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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For
the fiscal year ended
December 31, 2022
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission
file number
001-39725
Maravai LifeSciences Holdings, Inc.
(Exact
name of registrant as specified in its charter)
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Delaware
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85-2786970
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or other jurisdiction of incorporation or organization) |
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(I.R.S.
Employer Identification No.) |
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10770 Wateridge Circle
Suite 200
San Diego,
California
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92121
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(Address
of principal executive offices)
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______________________________
Registrant’s
telephone number, including area code: (
858)
546-0004
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Securities
registered pursuant to Section 12(b) of the Act:
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Class A common stock, $0.01 par value
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MRVI
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The Nasdaq Stock Market LLC
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Securities
registered pursuant to section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes x
No
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Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes o
No
x
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such filing requirements for the
past 90 days.
Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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filer |
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reporting company |
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growth company |
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If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act. o
Indicate
by check mark whether the registrant has filed a report on and attestation to its management's assessment of
the effectiveness of its internal control over financial reporting under Section 404(b) of the
Sarbanes-Oxley Act by the registered public accounting firm that prepared or issued its audit report.
x
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial
statements of the registrant included in the filing reflect the correction of an error to previously issued
financial statements. ▢
Indicate
by check mark whether any of those error corrections are restatements that required a recovery analysis of
incentive-based compensation received by any of the registrant’s executive officers during the
relevant recovery period pursuant to §240.10D-1(b). ▢
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
☐
No x
The
aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates
as of June 30, 2022, the last business day of the registrant’s most recently completed second
fiscal quarter, was approximately $
3,121.1 million, based on the closing price of the registrant’s common stock on
the Nasdaq Global Select Market of $28.41 per share.
As
of February 21, 2023,
131,785,305 shares of the registrant’s Class A common stock were outstanding and
119,094,026 shares of the registrant’s Class B common stock were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth herein,
is incorporated herein by reference from the registrant’s definitive proxy statement relating to
the Annual Meeting of Shareholders to be held in 2023, which definitive proxy statement shall be filed
with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which
this Report relates.
TABLE
OF CONTENTS
SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
This
Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the safe
harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Investors are cautioned that
statements which are not strictly historical statements constitute forward looking statements, including,
without limitation, statements under the captions “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and “Business”
and are identified by words like “believe,” “expect,” “may,”
“will,” “should,” “seek,” “anticipate,”
“intend,” “plan,” “goal,” “project,” “estimate,”
“likely,” or “could” and similar expressions.
Forward-looking
statements are neither historical facts nor assurances of future performance. Instead, they are based only
on our current beliefs, expectations and assumptions regarding the future of our business, future plans and
strategies, projections, anticipated events and trends, the economy and other future conditions. Because
forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and
changes in circumstances that are difficult to predict and many of which are outside of our control. Our
actual results and financial condition may differ materially from those indicated in the forward-looking
statements. Therefore, you should not rely on any of these forward-looking statements. Important factors
that could cause our actual results and financial condition to differ materially from those indicated
include those discussed under the heading “Summary of Risk Factors” and “Item 1A. Risk
Factors” as well as those discussed elsewhere in this Annual Report on Form 10-K.
Any
forward-looking statement made by us in this report is based only on information currently available to us
and speaks only as of the date of this report. We undertake no obligation to publicly update any
forward-looking statement, whether written or oral, that may be made from time to time, whether as a result
of new information, future developments or otherwise.
Part
I.
Item
1. Business
Overview
Maravai
LifeSciences Holdings, Inc. (also referred to in this document as “Maravai”, “we”,
“us” or “the Company”) is a leading life sciences company providing critical
products to enable the development of drug therapies, diagnostics, and novel vaccines and to support
research on human diseases. Our customers include the top global biopharmaceutical companies ranked by
research and development expenditures according to industry consultants, and many other emerging
biopharmaceutical and life sciences research companies, as well as leading academic research institutions
and in
vitro
diagnostics companies. Our products address the key phases of biopharmaceutical development spanning
research to commercialization and include complex nucleic acids for diagnostic, vaccine and therapeutic
applications, and antibody-based products to detect impurities during the production of biopharmaceutical
products.
Our
businesses principally address high growth market segments in biopharmaceutical development. In particular,
the field of cell and gene therapy has emerged as one of the fastest growing treatment modalities to address
a host of human conditions. There are more than 2,000 cell and gene therapies in development or launched and
sales in this category are expected to grow more than 5 times by 2027, according to industry consultants and
management estimates. Our portfolio offers key products for each stage of the cell and gene therapy
development lifecycle. For example, our messenger RNA (“mRNA”) products are used in drug
development to assist in the production of immune-activating antigens; our CleanCap® technology is used
to stabilize mRNA and streamlines mRNA manufacturing; we were one of the first companies to provide the
essential modified uridine, N1-methyl-pseudouridine triphosphate, for research applications; our catalog
mRNA products are frequently used by lipid developers to test and validate new mRNA delivery platforms; and
our plasmid DNA products are used as templates for the production of our ribonucleic acid mRNA products. Our
oligonucleotide and oligonucleotide supply products are included in the supply chain of several diagnostic
platforms. We also provide biologics safety testing technology used to ensure the safety of the biological
drug manufacturing process and drug products. Developers of therapeutics and vaccines, including cell and
gene therapies, comprise about 85% of our customer base.
Our
proprietary capabilities and products underpin the value we aim to provide to our customers. Among other
capabilities, we are experts in RNA and mRNA products, which are challenging and often unstable molecules
requiring significant chemical modifications to ensure their stability and efficacy in our customers’
applications. Notably, according to research commissioned by us in November 2021 consisting of over 55
interviews and in November 2022 consisting of 30 additional interviews with our current and former
customers, our competitors and industry experts focused across our two ongoing business segments (the
“Industry Analysis”), we believe CleanCap is viewed as a leading solution to incorporate the
five prime (“5’”) cap into mRNA. CleanCap is a novel chemical approach to produce the
5’ cap analog, which, in addition to making mRNA more stable, aids in protein production and helps
prevent an unwanted immune response to the mRNA. CleanCap had been incorporated into several mRNA programs
targeting immunization against the novel strain of coronavirus, SARS-CoV-2 (“COVID-19”). These
programs
included two commercial programs led by Pfizer in partnership with BioNTech and one led by BioNTech in
partnership with Fosun Pharma, as well as the bivalent booster vaccine developed by Pfizer in partnership
with BioNTech to address the Omicron strain of the virus.
In
addition to these commercialized programs, CleanCap has been incorporated into many earlier stage programs
addressing COVID-19 that have not yet been commercialized. Additionally, the U.S. Food and Drug
Administration (“FDA”) issued policies on February 22, 2021 to guide medical product developers
concerning the development of products to address the future of variants of the COVID-19 virus specifically
covering vaccines and therapeutics. We believe this guidance may streamline the future development and
approval of mRNA vaccines utilizing our products and that they would likely be incorporated into customer
regulatory filings as a result.
We
believe our CleanCap products have also been incorporated into vaccine development programs from several of
our licensed clients for infectious diseases, including Influenza, lyme disease, malaria, HIV, tuberculosis,
shingles, rabies, yellow fever, respiratory syncytial virus (“RSV”) and Zika.
We
estimate our mRNA and CleanCap products have also been incorporated in over 250 vaccine and therapeutic
programs in development as of December 31, 2022, including at least 60 programs that our mRNA CDMO
services group manufactured the mRNA APIs using CleanCap. In addition to infectious diseases, these programs
address a number of disease states, including ornithine transcarbamylase deficiency, glycogen storage
disorders, Alpha-1 antitrypsin deficiency, acute lymphoblastic leukemia, Hurler syndrome, ovarian cancer and
cardiovascular disease. These therapeutic programs also use multiple therapeutic modalities, including
CRISPR/Cas-9, transcription activator-like effector nuclease (TALENS), enzyme replacement therapies,
allogeneic CAR-T cells and base editing. Should one or more of these programs proceed to commercialization,
we believe we will continue to supply our customers and our products will likely be incorporated in customer
regulatory filings.
mRNA
is at the core of our capabilities. We developed our expertise in mRNA with a belief in its potential as a
therapeutic modality. The first clinical trial for an mRNA therapeutic agent occurred in 2016. Now, more
than 750
clinical trials are in the pipeline, principally focused on vaccines against viruses and cancer vaccines.
With the COVID-19 pandemic, mRNA has shown its potential for more rapid vaccine design and manufacture when
compared to traditional techniques involving culturing inactivated virus to elicit an immune response.
COVID-19 has helped highlight the potential advantage of mRNA as a treatment modality and directed
significant resources to the growing base of knowledge about mRNA. This knowledge is now being directed at
future vaccine programs addressing infectious diseases as well as for therapeutic agents for a host of human
diseases. We are positioned to serve our biopharmaceutical customers in the fast-growing field of mRNA
across a range of clinical programs for a variety of diseases.
Forming
long-term partnerships with our customers is core to our strategy. Today, we primarily serve our customers
during the product development and process development phases. During product development, we collaborate
with our customers to develop and synthesize nucleic acids, which in some cases comprise the active
pharmaceutical ingredient (“API”) of our customers’ products in development. We also
provide our customers a host of chemically complex and highly specialized raw materials. Process development
is a complex phase that establishes highly validated procedures and determines the investment in facilities
and equipment required to bring biopharmaceutical products to market. These decisions impact the viability
of our customers’ products for the long term. During process development, we provide enzyme-linked
immunosorbent assays (“ELISAs”) that reduce the risk posed by impurities and contaminants in
biological drugs, a critical step to ensure the safety of the drug product.
While
we do not provide products that are themselves regulated as drugs or in
vitro
diagnostics, our customers frequently incorporate our products into their highly validated products and
processes. For example, we provide oligonucleotides and antibody-based products used by in
vitro
diagnostic product manufacturers for their on-market products. Because of the extensive validation required
for these products, these components are frequently purchased for the life of our customers’ products
and we believe they are unlikely to be substituted. In addition, our analytical tools are used in the design
and development of manufacturing processes and often will be used throughout the life cycle of our
customers’ manufactured products. Once our services or products are qualified by our customers, we are
written into regulatory documents and standard operating procedures. As a result, our customer relationships
frequently span many years.
The
nature of our products and their uses require that they be manufactured by highly trained personnel in
state-of-the-art facilities following exacting procedures to ensure quality. As of December 31, 2022,
approximately 18% of our workforce have earned advanced degrees and all receive rigorous training on our
procedures. We manufacture our nucleic acid products at our San Diego, California facility (“Wateridge
facility”). The Wateridge facility was purpose-built to address our customers’ needs for
critical raw materials manufactured under certain good manufacturing practices (“GMP”)
conditions and APIs for investigational use. Our raw material products are manufactured following the
voluntary quality standards of ISO 9001:2015. Our GMP-grade raw materials follow ISO 9001:2015 standards,
additional voluntary GMP quality standards and customer specific requirements. Our API products are
manufactured following the voluntary quality standards of ISO 9001:2015, the International Council for
Harmonisation’s GMP Guide, comparable GMP principles for the European Union and customer specific
requirements. We believe our products are exempt from compliance with the current GMP (“cGMP”)
regulations of the
FDA,
as our products are further processed or incorporated into final drug products by our customers and we do
not make claims related to their safety or effectiveness. As of December 31, 2022, we had invested
$90.9 million in our Wateridge facility. Our other facilities are similarly designed for specific
applications with quality systems to match our customers’ requirements. All of our manufacturing
facilities meet applicable ISO standards.
We
built our business through a combination of acquisitions and subsequent investments in our acquired
companies to grow their commercial capabilities, upgrade and expand their research and production
facilities, deploy stringent quality systems, integrate their back-office functions, and develop the
personnel and management to fuel continued growth. Today, we offer an integrated portfolio that enables
innovation across the biopharmaceutical and academic markets. Mergers, acquisitions and strategic
partnerships that complement our capabilities in cell and gene therapy and biopharmaceutical production
remain core to our strategy. Our strategy aims to augment our strong organic growth with the addition of
synergistic products and capabilities.
Our
Portfolio and Capabilities
We
provide products that support our customers’ needs from discovery through commercialization of their
vaccines, therapeutic agents and in
vitro
diagnostic products. Our products are frequently incorporated into our customers’ products, whether as
research products or APIs used in development or research products incorporated as raw materials into
on-market products. They may also be incorporated into the manufacturing process itself. We are therefore a
critical part of our customers’ supply chain and they frequently seek to maintain their supply
relationship with us for the life of their products or development programs.
Our
products address our customers’ needs for nucleic acid production and biologics safety testing, and
our operations are aligned to these two segments. Our products and the end markets they serve are depicted
in the following image:
Nucleic
Acid Production (92% of Revenue for the Year Ended December 31, 2022)
We
are a global provider of highly modified, complex nucleic acids and related products. We have recognized
expertise in complex chemistries and products provided under exacting quality standards. Our core offerings
include mRNA, long and short oligonucleotides, our proprietary CleanCap mRNA capping technology, mRNA
building blocks and oligonucleotide building blocks. Our offerings address key customer needs for critical
components, from research to GMP-grade raw materials and API manufacturing. We market our nucleic acid
products under the TriLink BioTechnologies® and Glen Research brands.
The
growth in our nucleic acid production business segment has been fueled by the significant growth in
biological drugs in development, many of which are cell and gene therapies, and by the rapid rise in mRNA
vaccines. mRNA as a treatment modality has been an area of acute interest for many years.
The
success of COVID-19 vaccines has helped highlight the potential advantage of mRNA as a treatment modality
and significant investments have been made industry wide to developing future mRNA vaccines as well as for
therapeutic agents for
a
host of human diseases. We are positioned to serve our biopharmaceutical customers in the fast-growing field
of mRNA across a range of clinical programs for a variety of diseases.
We
offer the following nucleic acid products: mRNA, RNA Capping (CleanCap), oligonucleotides, oligonucleotide
inputs, nucleoside triphosphates, custom nucleic acid chemistry and plasmid DNA.
mRNA.
mRNA is an intermediary molecule that translates the genetic information stored in DNA into proteins. The
genetic information stored in DNA is transferred to mRNA in a cellular process called transcription. This
process occurs in the nucleus of cells. DNA, a double stranded molecule, is unwound and copied as mRNA by
the enzyme RNA polymerase. mRNA is then transferred out of the nucleus to the cytosol, a component of the
cytoplasm of a cell, where it serves as a blueprint for making cellular proteins by a multi-component
organelle complex called the ribosome.
mRNA
has traditionally been a difficult molecule for vaccine and therapeutic purposes. mRNA is inherently
unstable compared to DNA and is susceptible to degradation by ubiquitous enzymes called RNases. mRNAs are
also physically and chemically fragile and can degrade at elevated temperatures and under shear forces that
occur during downstream manufacturing processes. We have developed manufacturing processes that overcome
many of these obstacles, resulting in highly effective mRNA.
We
develop and manufacture mRNA products to support vaccine and therapeutic programs from pre-clinical
development through and including clinical phases, including scale-up and analytical development services.
The mRNA molecules may serve as APIs for diverse applications, such as enzyme replacement therapies, gene
editing therapies and vaccines. We offer both research grade material and material made under GMP conditions
for early phase clinical trials.
RNA
Capping. Within
the mRNA category, we also offer our CleanCap products. Our proprietary CleanCap analogs principally serve
the mRNA vaccine and therapeutics markets, including vaccine candidates in development for immunizing
against COVID-19. Cap analogs are a component of mRNA that aids in protein production as well as in making
mRNA more stable inside cells. For mRNA to serve as a template to make a protein, it requires a special cap
at the 5’ end of the molecule. The cap structure also affects the stability of the mRNA. Lack of a cap
can result in activation of the innate immune system, which can affect the production of the desired protein
or elicit undesired biological effects. We offer a suite of CleanCap analogs that are specifically made for
therapeutics and vaccines. Based on the Industry Analysis, we believe our cap analogs are critical features
of several mRNA vaccines in development.


Traditionally,
the 5’ cap has been added in one of two ways. The cap can be added post mRNA synthesis by an enzymatic
process. This enzymatic method has several drawbacks, including the high cost of the capping enzymes as well
as the need to perform additional processing steps to the mRNA to remove enzymes and byproducts of the
capping reaction. While capping efficiency is usually high, the extra processing steps typically result
degradation and mRNA of poorer quality. The second method is to add a synthetic cap analog into the
transcription reaction such that the mRNA is transcribed and capped in a single step. Anti-reverse cap
analog (“ARCA”) is an example of a cap analog that is added to the transcription reaction. This
avoids the workflow challenges of the enzymatic process, but typically results in lower yields.
Like
ARCA, CleanCap is a synthetic, chemically-made mRNA 5’ cap analog added to the transcription process
in a single step. Unlike ARCA, however, CleanCap results in significantly higher levels of capping
efficiency, resulting in very low levels of uncapped mRNA, which in turn minimizes the risk of activation of
the innate immune system. In addition, CleanCap’s higher mRNA yields compared to ARCA result in lower
cost of goods. When compared to enzymatic capping, CleanCap removes the
additional
downstream purification steps required. We have developed a suite of CleanCap analogs that are specifically
designed for therapeutics and vaccines. CleanCap is sold as a stand-alone reagent or bundled with other mRNA
products.
We
currently offer several variations of the CleanCap molecule, serving the needs of mRNA and self-amplifying
RNA developers. CleanCap is in two quality grades, research use only for discovery and development
activities, and a GMP-grade for clinical and commercial applications. CleanCap mRNA products represented 89%
of our nucleic acid production revenue for the year ended December 31, 2022 (including the revenue from
CleanCap products).
Oligonucleotides.
The oligonucleotide product category supports broad customer applications, including therapeutics,
in
vitro
diagnostics, next generation sequencing (“NGS”) and CRISPR-based gene editing. Most of our
TriLink BioTechnologies oligonucleotide products are custom manufactured DNA or RNA sequences, often highly
modified and produced as research grade or under GMP conditions for use in development, clinical and
commercial applications.
Oligonucleotide
Synthesis Inputs. Our
product offerings through Glen Research include reagents and support supplies for DNA and RNA
oligonucleotide synthesis, labeling, modification and purification. We are a reputable and trusted vendor
with a large portfolio, quality brand, knowledgeable technical support, and responsive customer service. In
addition to oligonucleotide synthesis service providers, our customer base includes life science, biopharma,
and diagnostic companies as well as academic institutions and government organizations, all of which
internally manufacture their own oligonucleotide products.
Nucleoside
triphosphates.
Nucleoside triphosphates (“NTPs”) are the precursors to DNA and RNA. They are composed of a
nitrogen base bound to either ribose or deoxyribose with three phosphate groups added to the sugar. We
manufacture NTPs that are used in polymerase chain reactions (“PCR”), in sequencing reactions
and in the manufacture of mRNA. The NTPs can be unmodified, composed of the four standard bases, or
modified, with a base altered to enhance a particular biological property, such as the ability to evade the
innate immune system in therapeutic applications. TriLink BioTechnologies NTPs are used by customers in both
research and clinical trial applications. Our manufacturing capabilities for NTPs now includes both research
use and GMP-grade.
Custom
Nucleic Acid Chemistry.
Through our acquisition of MyChem LLC in the first quarter of 2022, TriLink BioTechnologies expanded its
synthetic chemistry expertise and added proprietary manufacturing processes allowing for the highest purity
NTP, amidite and custom nucleotide services. We serve a diverse market of diagnostics and therapeutic
developers that require novel molecules that are otherwise unavailable on the market. Typically, these
molecules are initially manufactured in small quantities, and then scaled to meet the need of larger
diagnostic platform or therapeutic applications once positive candidates have been identified by the
customer.
Plasmid
DNA.
Unlike genomic DNA, which constitutes the chromosome, plasmid DNA exists outside the chromosome and
represents small circular double-stranded constructs. Plasmid DNA is frequently used as a vector for
replicating nucleic acid products. Plasmid DNA is integral to the production of mRNA, serving as the nucleic
acid template for the DNA-dependant RNA polymases that frequently are used in the manufacturing of mRNA. Our
plasmid DNA offering allows us to ensure the quality and timeliness of the mRNA API manufacturing campaigns
that we service for our customers.
Biologics
Safety Testing (8% of Revenue for the Year Ended December 31, 2022)
We
provide products and services under the Cygnus Technologies®, LLC (“Cygnus Technologies”)
brand that ensure the purity of our customers’ biopharmaceutical products, including biological drugs.
For over 20 years, the Cygnus Technologies brand has been associated with products and services that enable
the detection of impurities present in bioproduction. Our biologics safety testing products are used during
development and scale-up, during the regulatory approval process and throughout commercialization. We are
recognized globally for the detection of host cell proteins (“HCPs”) and process-related
impurities during bioproduction.
Our
customers in this segment manufacture a broad range of biopharmaceutical products. These include monoclonal
antibodies and recombinant proteins, both as novel biologics and biosimilars, and recombinant vaccines,
including vaccines to prevent COVID-19 and to treat cancer. We also provide products in support of the
development of cell and gene therapies. Recombinant vaccines and cell and gene therapies rely on
manufacturing of various viral vectors produced using recombinant nucleic acid and cell culture
technologies. Viral vector manufacturing processes require rigorous analytics, including testing for
process-related impurities such as HCPs, host cell DNA, purification leachates, growth media additives and
enzymes used in viral vector purification processes. Of all process-related impurities, HCPs present the
most complex impurity. Per regulatory requirements, viral vectors used as a component of CAR-T cell
therapies or as gene therapies must be produced in certain cell lines, purified and tested for the presence
of host cell proteins. All of the 15 existing FDA-and EMA-approved CAR-T Cell and Gene Therapies use Cygnus
Host Cell Protein ELISA kits for HCP testing for commercial product lot release. Five of these 15 therapies
were approved in 2022.
ELISA
is the benchmark method for monitoring levels of process-related impurities during the purification process
and in product release testing. The advantages of well-developed ELISA kits include the ability to measure
very low levels of
impurities
in the presence of high amounts of drug product, without requiring a high level of expertise to execute and
interpret, and are readily transferable across an organization from process development to manufacturing and
quality control bioanalytical groups. Though relatively simple to run, these ELISA kits require a high level
of expertise to design, develop and qualify.
Customers
establishing biopharmaceutical manufacturing processes may use off-the-shelf or generic HCP kits provided by
manufacturers like ourselves, or they may choose to design their own in-house assays for their specific
processes. Some customers may choose to use generic assays early in development and migrate to
process-specific assays later. The trend in recent years has been for customers to increasingly use generic
assays throughout their development pathway, relying on our expertise and the established performance of our
assays. If customers choose to develop process-specific assays, we offer custom antibody production and
assay development as well as characterization services to meet their needs.
Our
comprehensive catalog of Cygnus Technologies HCP ELISA kits cover 23 expression platforms and provides the
specificity and sensitivity to detect impurities with reproducibility, which supports regulatory compliance.
Our reputation for quality is recognized by the industry and global regulatory agencies, with Cygnus
Technologies assays used as reference methods throughout the industry and to support manufacturing and
quality control of commercialized biologics.
Our
customers in this segment are biopharmaceutical companies, contract research organizations
(“CROs”), contract development and manufacturing organizations (“CDMOs”) and life
science companies.
Cygnus
Technologies product categories include HCP ELISA kits, other bioprocess impurity and contaminant ELISA
kits, viral clearance prediction kits, ancillary reagents and custom services.
HCP
ELISA kits.
HCP ELISAs are kits used to detect residual proteins from the expression system used in bioproduction. HCPs
constitute a major group of process-related impurities produced using cell culture technology no matter what
cell expression platform is used. HCPs pose potential health risks for patients and the risk of failure of
safety endpoints for drug manufacturers. When present in the administered product, even at low levels, HCPs
can induce an undesired immune response, interfere with drug efficacy and impact drug stability. HCPs are a
critical quality attribute for biologics safety testing development and must be adequately removed during
the downstream purification process.
Other
impurity and contaminant kits.
Products in this category include kits for measuring Protein A leachate, which results from the affinity
purification method used for monoclonal antibody therapeutic agents; ELISA kits for measuring additives in
growth media, such as bovine serum albumin; kits for measuring host cell DNA; ELISA kits to detect and
quantify residual endonuclease impurities in recombinant viral vector and vaccine preparations: and ELISA
kits to quantify residual AAV2, AAV8, AAV9 ligands resulting from affinity purification method used for
adeno associated virus (AAV)-based gene therapies.
Viral
Clearance Prediction kits.
In 2020, Cygnus Technologies introduced the MockV® Minute Virus of Mice (“MVM”) kit, a
novel, proprietary viral clearance prediction tool that includes a non-infectious “mock virus
particle” mimicking the physicochemical properties of live virus that may be present endogenously in
the drug substance or introduced during bioproduction. The kit enables manufacturers to conduct viral
clearance assessments easily and economically and to predict outcomes in-house ahead of costly and
logistically challenging live viral clearance studies. In 2022, Cygnus Technologies introduced MockV®
RVLP Kit. This kit enables bioprocess scientists to quantify the removal of Retrovirus-like Particles
(RVLPs)
produced endogenously by Chinese Hamster Ovary (CHO) cell lines during biopharmaceutical manufacturing. The
kit includes a highly purified and concentrated stock solution of RVLP, an actual non-infectious
retrovirus-like contaminant generated during CHO production. In the early 1990s, global regulatory agencies
such as the FDA realized the prevalence of this particle and became concerned about the retroviral safety of
CHO-derived biopharmaceuticals. Since then, the biopharmaceutical industry has relied on CROs to propagate
Xenotropic Murine Leukemia Virus (XMuLV) as a model retrovirus to demonstrate effective clearance. With the
availability of the MockV® RVLP Kit, biopharmaceutical companies can now independently assess the
removal of the original retroviral particle of regulatory concern, derived directly from CHO cells.
Ancillary
reagents.
These products include antibodies, antigens, sample diluents and other auxiliary products necessary to
optimize applications for customer processes.
Custom
services.
We provide process-specific antibody and ELISA development, qualification and maintenance services. In
addition, we have pioneered advanced orthogonal methods including antibody affinity extraction (AAE™)
and mass spectrometry for HCP antibodies coverage analysis and HCP identification, which we provide as
custom services.
Our
Competitive Strengths
We
believe we are a leader in providing nucleic acid products and biologics safety testing products and
services to biopharmaceutical customers worldwide. Our success is built on the ability of our proprietary
technologies and products, provided under exacting quality standards, to reliably serve our customers’
needs for critical raw materials.
Leading
Supplier of Critical Solutions for Life Sciences from Discovery to Commercialization
We
seek to be an important component of our customers’ supply chain by providing inputs that are central
to the performance of their products and processes throughout the product lifecycle. By collaborating with
customers early in the development phase, our products frequently follow our customers’ development
path to commercialization and are likely to be incorporated as raw materials in their on-market products and
processes. Our decades-long experience and track record, coupled with our ongoing investment in facilities
and quality systems, allow our customers to rely on us for their critical products. Our approach is to be a
trusted partner throughout the life cycle of our customers’ products.
Innovation,
Proprietary Technologies and Expertise Underpin Our Portfolio
Our
expertise in complex chemistries leads customers to seek our collaboration in designing complex products
that meet high performance expectations. Based on the responses to the Industry Analysis, we believe the
solutions we provide, in many cases, cannot be provided effectively by our competitors. In certain cases,
like our CleanCap technology, our know-how is backed by intellectual property. In other cases, such as our
HCP products, our antibodies are proprietary and therefore can only be supplied by us. We believe the
proprietary nature of our expertise and products solidifies our long-term customer relationships.
Products
with Outstanding Quality Performance
We
believe our products stand out when compared to those of our competitors’ because they present
innovative solutions to customer needs, as indicated by the responses to the Industry Analysis, while
providing reliable performance and quality. CleanCap, for example, offers advantages over competing capping
technologies in yield, stability and safety. Our oligonucleotides address complex chemistry challenges,
which we believe few competitors can address. The results of the Industry Analysis indicate that our HCP
ELISA kits have defined the market for impurity detection and we believe they have become a de
facto
standard in biologics safety testing.
Trusted
Brands
Our
TriLink BioTechnologies, Glen Research, and Cygnus Technologies brands are well known in their respective
markets for consistent quality and performance. This brand recognition has been earned over decades. Our
manufacturing processes, quality standards, technical support and high-touch customer service ensure that we
maintain the reputation of our brands.
State-of-the-Art
Manufacturing Facilities
Our
biopharmaceutical customers manufacture their products to meet stringent quality standards under strict
regulatory guidelines and expect their critical suppliers to meet their exacting requirements. Our customers
further expect that we have the production capacity to meet their needs in a timely manner. As of
December 31, 2022, we had invested approximately $90.9 million into our flagship Wateridge
facility and its five dedicated manufacturing suites to produce materials under GMP conditions, along with
the required quality systems to meet requirements specified by our customers. Additionally, this investment
in our Wateridge facility allows us to meet our customers demand for our nucleic acid products, including
CleanCap.
We similarly invest in our other sites to ensure we meet our customers’ expectations. Throughout 2022
we invested in additional facilities that we expect to bring online operationally in 2023, including 1) an
additional facility in San Diego, California to further support GMP-grade manufacturing and to support
customers into Phase II clinical trials and beyond, and 2) a new state of the art facility in Leland, North
Carolina to further support the Biologics Safety Testing business. We believe that the capacity to
manufacture to stringent biopharmaceutical standards is constrained within the industry and our ability to
meet this demand sets us apart from our competition.
Experienced
Leaders and Talented Workforce
Our
management includes experienced leaders with demonstrated records of success at Maravai and other highly
regarded industry participants. In addition, as of December 31, 2022, approximately 18% of our
workforce have earned advanced degrees and all receive rigorous on the job training. We believe the quality
of our personnel is critical to ensuring the collaborative, long-standing relationships we maintain with
many of our customers.
Our
Markets
We
participate in two distinct market segments: nucleic acid production and biologics safety testing, which,
according to industry consultants, together represented approximately $15.2 billion in annual spending in
2022. Of that combined market, we estimate our addressable portion represents approximately $3.7 billion.
Our businesses principally address high growth market segments in biopharmaceutical development. In
particular, the field of cell and gene therapy has emerged as one of the fastest growing treatment
modalities to address a host of human conditions. There are more than 2,000 cell and gene therapies in
development or launched and sales in this category are expected to grow more than five times by 2027,
according to industry consultants and management estimates.
While
we expect near-term declines in overall market demand for COVID-related products, we expect to benefit from
favorable industry dynamics in our broader market segments and specific growth drivers in our addressable
market segments.
Biopharmaceutical
customers are increasingly relying on outside parties to provide important raw material inputs and services
for their clinical research and manufacturing, a development driving growth for suppliers with unique
capabilities, high quality and the ability to manufacture at a relevant scale to support customer programs.
We believe that suppliers like ourselves, with this rare combination of capabilities, proprietary products
and the required investment in manufacturing and quality systems, are benefiting from rapid growth as
biopharmaceutical customers seek to partner with a small number of trusted partners.
In
addition to the continued trend toward outsourcing, several market developments should contribute to
long-term growth in our addressable market segments, including:
•Pivot
toward mRNA vaccines and therapeutics for non-COVID indications has been accelerated in part by
COVID-19.
The first two vaccines approved for use in combating the COVID-19 pandemic were mRNA vaccines,
including
the vaccine developed by Pfizer and BioNTech which uses our CleanCap product. Our CleanCap product is also
incorporated into the bivalent booster vaccine developed by Pfizer and BioNTech. The mRNA platforms are
gaining prominence as a result of their fast development time, lower relative manufacturing costs and proven
safety profile. Pfizer and BioNTech are now developing a combined COVID-19 and Influenza vaccine that has
been placed into a designation that can “fast-track” a regulatory decision by the FDA. In
addition to the COVID-19 vaccines, mRNA technology is being investigated for a spectrum of other infectious
diseases as well as cancer vaccines, including personalized medicine vaccines. We expect research in other
mRNA vaccines to experience increased growth as research conducted for COVID-19 diffuses more broadly into
other vaccines and therapies. RNA expertise is highly specialized, and customers seek partners with our
expertise to provide these complex products. A small number of providers, like ourselves, with a successful
track record for COVID-19, can provide this level of RNA capability.
•Rapid
growth in development of cell and gene therapies.
Five new cell and gene therapy approvals (Carvykti, Roctavian, Upstanza, Hemgenix, Adstiladrin) were all
granted FDA or EMA approval in 2022 and have added clinical credibility to cell and gene therapies. Our
internal analysis, supported by third-party research, projects that by 2027, 40-50% of the mRNA pipeline
assets will be for
in vivo
gene editing and ex
vivo
gene-edited cell therapies. We support the development of cell and gene therapies by providing products used
in gene editing and cell therapy research. For example, our host cell protein assays are used during the
manufacturing of viral vectors and plasmid DNA. Further, we participate by providing the critical high
quality synthetic guide RNA and mRNA that encodes for gene-editing enzymes, such as Cas9 that are used
in
vivo
gene editing and ex
vivo
gene-edited cell therapies.
•Large
and growing pipeline of protein-based therapeutics.
In addition to cell and gene therapies, an increase in protein-based therapies is driving the need for
impurity testing during process development and manufacturing from our Biologics Safety Testing business.
Classical biologics are evolving to be expressed in vivo
via mRNA. Our analysis suggests that therapeutic proteins and protein replacement may represent as much as
25% of the mRNA pipeline by 2027. We are well positioned to leverage our service capabilities and deep
understanding of mRNA biology to serve our customers’ needs to express these large, complex,
peptide-based molecules.
Nucleic
Acid Production Market
The
nucleic acid production market includes the production and synthesis of reagents for research and
manufacturing of DNA and RNA-based biologics. Nucleic acid production was an $11.0 billion market in 2022.
Market growth generally accelerated in recent years until the middle of 2022 due to continued innovation in
cell and gene therapy, including mRNA therapeutics and synthetic biology approaches, and particularly as a
result of mRNA manufacturing of COVID-19 vaccines.
The
field of mRNA-based drugs and vaccines has advanced dramatically within a few short years. Capacity to
manufacture these products when approved, however, remains in short supply. Providers of technical expertise
and manufacturing capabilities, like ourselves, with the facilities and quality systems demanded by
biopharmaceutical customers, benefit from the demand created in the mRNA category.
Biologics
Safety Testing Market
The
biologics safety testing market includes the detection and clearance of downstream bioprocessing
product-related and process-related impurities. Biologics safety testing is a $4.2 billion market in 2022.
We participate in the HCP and other process related impurities and viral contamination segments of this
market for biopharmaceutical vaccine and therapeutics manufacturing. The growth in this market is driven by
continued growth of biologics and biosimilars, viral vector manufacturing for rapidly-growing CAR-T and gene
therapy modalities, and increased outsourcing of process development.
Our
Strategy
Our
customers strive to improve human health. Our goal is to provide them with products and services to
accelerate their development efforts, from basic research through clinical trials and ultimately to
commercialization for therapeutics, diagnostics and vaccines.
Supporting
Biopharmaceutical Customers from Discovery Through to Commercialization
Our
customers include both emerging and established biopharmaceutical leaders developing novel drugs,
therapeutics, diagnostics and vaccines. Emerging biopharmaceutical customers frequently seek the support we
can offer in our state-of-the-art facilities under our stringent quality standards, with the capabilities
that result from the capital and process investments we have made over the last several years. We are
capable of manufacturing reagents from research-grade to GMP-grade, which
often
exceeds the in-house capabilities of our pre-commercial customers. The results of the Industry Analysis
indicate that our emerging and established customers also seek us out for our leading capabilities in
nucleic acid chemistries and process control assays. We have expertise in complex chemistries, especially in
highly modified nucleic acids and mRNA, and we believe we are a leader in applying these capabilities to the
development of vaccines and therapeutics. We further support our customers as they transition from product
development to commercialization by providing critical raw materials for their drugs. A core component of
our strategy is the continued investment in facilities, quality standards and products and services that
allow us to support our customers through the entire life cycle of their drugs.
Developing
Proprietary Technologies that Deepen our Relationships with Our Customers
We
believe we are experts in nucleic acids and our scientists aim to develop proprietary enabling technologies
that become integral to our customers’ products. For example, CleanCap, our proprietary chemical
capping technology, has demonstrated its advantages in terms of the stability of the associated mRNA and its
efficiency in protein production when compared to traditional capping technologies. This efficiency has led
biopharmaceutical customers to employ CleanCap in their vaccine and therapeutic programs. As those products
proceed through development into commercialization, we believe CleanCap will be a critical input in
on-market vaccines and therapeutics.
Forming
Long-Term Partnerships for Critical Biopharmaceutical Components and Process Tests
Our
products are frequently incorporated into regulated and highly validated therapeutic and diagnostic products
and processes. Our biopharmaceutical customers expect us to provide them with consistent, high-quality
products that meet narrow specifications, and that we ensure their supply chain for such products for the
length of their programs. In many cases, we may be the sole source of the products we provide. We therefore
take seriously our responsibility to our biopharmaceutical partners, and by extension the patients they
serve. Our emphasis on partnership generally leads to long-term relationships with our customers.
Focusing
Our Efforts on High Growth End Markets
While
biopharmaceutical research and in
vitro
diagnostics markets are experiencing strong growth, we target the highest growth segments within those
markets. Our product portfolio is well positioned to serve the biologic, cell and gene therapy and mRNA
vaccine and therapeutic end markets, which are currently experiencing above-market growth. By investing in
technologies at the forefront of biopharmaceutical and in
vitro
diagnostics, we aim to remain focused on the highest-growth applications.
Acquiring
Leading Life Sciences Businesses and Supporting Their Continued Development
We
built our business by acquiring established and emerging companies with strong scientific foundations in our
target markets and investing in their systems, processes and people to accelerate their growth and expand
their technologies. Going forward, we may pursue strategic acquisitions that we believe meet, or could meet
after being acquired and expanded, the following criteria:
•address
our core target markets;
•have
a demonstrated adherence to high quality standards;
•be
leaders in their market niche(s);
•have
differentiated or proprietary products and processes that provide clear value to our biopharmaceutical and
other customers; and
•have
a track record of attractive rates of growth and compelling returns on invested capital.
Our
acquisition strategy is to invest significantly in our acquired businesses. We strive to rapidly integrate
their quality, human resources, information and financial systems into our shared services. All of our
companies share a common enterprise resource planning system, and we implement our financial controls and
reporting systems soon after acquisition. We seek opportunities to invest in their facilities and personnel
to provide an operating foundation for growth. We also augment their commercial capabilities through a
combination of sales and marketing resources dedicated to each business, supported by our global marketing
infrastructure.
We
will continue to seek a balance between driving growth organically and inorganically through
acquisitions.
Commercial
We
have relationships with the following categories of customers: developers of therapeutics and vaccines,
other biopharmaceutical and life science research companies, academic institutions and molecular diagnostic
companies. Developers of therapeutics and vaccines, including cell and gene therapies, comprise about 85% of
our customer base. Our biopharmaceutical customers include startups, established biotechnology companies and
large pharmaceutical companies developing enzyme replacement therapies, gene editing therapies, ex
vivo
therapies and vaccines.
Our
commercial function includes direct sales, marketing, customer service, technical support and distributor
management. We serve customers through direct sales in each business segment, with a primary focus on our
biopharmaceutical and large diagnostics and commercial customers. We serve our academic customers via web,
email and phone ordering as well as through key partnerships where our reagent products are included in
their mRNA kits. We support all customers with live technical support and customer service.
We
address customers outside the United States with a combination of direct sales and distributors. We serve
many of our biopharmaceutical customers, especially in our nucleic acid production segment, via direct sales
worldwide. Our distributors also sell our products in over 45 countries and provide customer service and
local sales and marketing.
Competition
We
compete with a range of companies across our segments.
Nucleic
Acid Production
Within
nucleic acid production, we compete with four primary types of companies: (1) chemistry companies that
create and produce the basic monomers, amidites, and supports that go into the creation of an
oligonucleotide; (2) oligonucleotide manufacturers that specialize in custom oligonucleotide development of
varying complexities and scales; (3) mRNA biotechnology companies that create fully processed mRNA and
specialize in custom, complex orders; and (4) CDMOs that have the capability to accept work from large
biopharmaceutical companies and serve as the outsourcing entity for the development and manufacturing of
nucleic acid products. However, it is important to note that CDMOs seldom offer proprietary products.
For
mRNA capping analogs, we compete principally with Thermo Fisher Scientific, Aldevron (a subsidiary of
Danaher), and New England BioLabs, who offer alternatives to CleanCap with enzymatic capping solutions. Many
biopharmaceutical companies produce capping solutions in-house using enzymatic or ARCA processes. However,
given CleanCap’s high yield and process efficiency, many customers who previously insourced these
processes have begun to partner with us. Based on the Industry Analysis, we believe our products and
services are more effective than those of our competitors. Deep scientific expertise, intellectual property
protection and specialty equipment serve as barriers to entry in this space.
For
our mRNA offerings, we compete with Aldevron Patheon, eTheRNA, Lonza, Catalent, and Samsung Biologics, among
others. Based on the Industry Analysis, we believe we have a reputation for our expertise in the RNA space
with talented scientists who are constantly pushing the frontier of RNA science. This scientific expertise
and the required high-cost equipment serve as barriers to entry. In addition to our expertise, we believe
our GMP cleanroom manufacturing process differentiates us from competitors.
For
custom oligonucleotides, we compete with a number of manufacturers. Custom oligonucleotide providers include
those that provide complex, highly modified oligonucleotides and those that provide less complex offerings.
In the custom oligonucleotide space, complexity is based on the length of the sequence and level of
modification to the phosphate backbone. Large manufacturers like Integrated DNA Technologies, Thermo Fisher
Scientific and EMD Millipore Corporation (“Millipore Sigma”) serve less complex customer needs
while we, LGC Biosearch Technologies and GenScript Biotech Corporation serve more complex customer needs. In
the custom oligonucleotide market, we have a reputation for accepting complex orders and delivering high
purity products that reduce researcher re-work and save money. Quick turnaround times and the ability to
produce at scale are essential requirements in this segment.
In
the oligonucleotide synthesis inputs market, we compete against large distributor-manufacturers like Thermo
Fisher and Millipore Sigma while also serving them as customers. Our Glen Research brand has a long history
in this industry, which drives customer loyalty, and has a reputation for high-fidelity technical service,
focusing on supplying and sourcing highly modified inputs for its customers.
Biologics
Safety Testing
For
drugs in early development, we compete against other bioprocess impurity kit providers such as BioGenes
(“BioGenes”) or Enzo Life Sciences (“Enzo”). Competitors generally offer fewer
expression platforms (generally between one and three)
compared
to our offering of 23 expression platforms and over 75 different impurity detection kits. As a drug
successfully moves forward to validation and approval stages, a customer may either continue with an
off-the-shelf kit or they may begin the process to develop a custom assay that is tailored to meet their
specific host cell and manufacturing process needs. During the entire drug development process, and
especially during this decision, we are partners with the manufacturer and provide our expertise to help
them make the best bioprocess quality control and testing-related decisions.
If
a drug manufacturer continues with an off-the-shelf assay from development to validation and approval, they
will generally stay with the incumbent kit provider due to the extensive validation they have conducted. For
custom assay development, our main competitors are BioGenes, Rockland Immunochemicals and some CDMOs and
CROs with custom assay development capabilities. The trend in recent years has been for CDMOs, CROs and
large biopharmaceutical companies to focus on core competencies and outsource host cell protein assays or
qualify off-the-shelf kits when possible.
Licenses
and Collaborations
Broad
Patent License Agreement
We
(through TriLink BioTechnologies) entered into a Nonexclusive Patent License and Material Transfer Agreement
with The Broad Institute, Inc. (“Broad”) effective as of July 5, 2017, and amended on
September 29, 2017 (the “Broad Patent License Agreement”). Broad, together with a consortium of
educational institutions (including Harvard University and the Massachusetts Institute of Technology), owns
and controls certain patent rights relating to genome editing technology, including the CRISPR-Cas9 gene
editing processes and have a licensing program for use and commercialization of technologies and products
covered by the underlying patent rights. Under the Broad Patent License Agreement, Broad grants to us a
non-exclusive, royalty-bearing, non-transferable and non-sublicensable, worldwide license under the licensed
patent rights to manufacture and sell products and to perform certain in
vitro
processes or services on a fee-for-service basis, in each case, solely as research tools for research
purposes (excluding human, clinical or diagnostic uses). We must use diligent efforts to develop products,
introduce products into the commercial market and make products reasonably available to the public. We are
obligated to pay a mid-five figure annual license maintenance fee and royalties in the range of 5% to 10% on
net sales of covered products and processes.
The
term of the Broad Patent License Agreement extends through the expiration of the last to expire claim of any
of the licensed patents. We are entitled to terminate the Broad Patent License Agreement for convenience at
any time on at least three (3) months written notice, in which case we must continue to pay license
maintenance fees and royalties as noted above for the sale of products that are not covered by the specific
claims of the licensed patent rights but are otherwise derived from such licensed patent rights or from
products covered by such licensed patent rights. Broad may terminate the license for our uncured failure to
make payments, for our uncured material breach or if we bring a patent challenge against any of the
institutional rights holders.
LSU
Patent License Agreement
We
(through TriLink BioTechnologies) entered into a Patent License Agreement with the Board of Supervisors of
Louisiana State University and Agricultural and Mechanical College and Dr. Edward Darzynkiewicz
(collectively, “LSU”) effective as of July 7, 2010 (the “LSU Patent License
Agreement”). Under the LSU Patent License Agreement, LSU grants to us a non-exclusive, royalty-bearing
license under an issued U.S. patent and patents that claim priority thereto, directed to mRNA capping
technology to make and sell reagents and kits for research use only (excluding use in humans or for
diagnostic or therapeutic purposes) in the United States. We are required to use commercially reasonable
efforts to commercialize the licensed products throughout the life of the LSU Patent License Agreement. We
are obligated to pay a low four-figure annual license maintenance fee and royalties in the range of 5% to
10% on net sales of licensed products.
We
must pay royalties to LSU until the expiration of the last to expire licensed patents. We are entitled to
terminate the LSU Patent License Agreement for convenience at any time on at least sixty (60) days written
notice, subject to paying in full all amounts due up to the date of termination and cessation of any
exercise of the licensed rights thereafter. LSU may terminate the license for our uncured failure to make
payments or our uncured material breach.
AmberGen
Agreement
We
(through Glen Research) entered into an Agreement with AmberGen, Inc. (“AmberGen”), dated
May 11, 2000 (the “AmberGen Agreement”) under which AmberGen has appointed us the exclusive
distributor of AmberGen’s proprietary photocleavable product offered under the name PC Phosphoramidite
on a worldwide basis. We are limited to selling the product for research use only and are required to use
good faith efforts to discontinue distribution to buyers making use of the product than purposes other than
laboratory research.
We
are entitled under the AmberGen Agreement to purchase product from AmberGen at AmberGen’s cost to
manufacture the product. On a monthly basis, we are required to remit to AmberGen 50% of the gross profits
on product sales for which payments were received in the preceding month.
The
AmberGen Agreement was initially in effect for a five-year term but is now in a series of automatic one-year
renewal terms. Either party may terminate the AmberGen Agreement on six (6) months written notice or
immediately for material breach of the other party or, subject to a cure period, for certain
bankruptcy-related events.
BTI
Biosearch Dyes Agreement
We
(through Glen Research) are a party to a Commercial Supply and License Agreement with Biosearch
Technologies, Inc. (“BTI”), dated June 29, 2004, as amended on November 8, 2004 (the “BTI
Biosearch Dyes Agreement”), under which BTI agrees to supply us with certain BTI dyes and we are
granted a worldwide, non-exclusive license to sell certain BTI dyes and to use BTI’s product-related
trademarks to do so. The BTI dyes can only be sold for the customer’s internal research and
development use and inclusion in commercial kits or any commercial application is prohibited unless the
customer has obtained a valid commercial license from BTI. The rights granted do not include sales to
customers for use in human in
vitro
or clinical diagnosis. We are required to pay a per unit price for the licensed BTI products.
The
BTI Biosearch Dyes Agreement was originally in effect for a term of two years and is now in a series of
annual year-to-year renewals. Either party has the right to opt-out of such renewals upon ninety (90)
days’ notice prior to the next renewal. Either party can terminate the agreement for convenience at
any time on six months’ written notice. Either party can terminate the agreement for the other
party’s uncured material breach or insolvency.
Manufacturing
and Supply
We
occupy facilities in San Diego, California, Southport, North Carolina and Sterling, Virginia.
Our
Wateridge facility in San Diego is engaged in the manufacture of reagents. The facility was designed and
built by us in conjunction with the building owner to contain fully functional chemical and biological
manufacturing operations from material receiving to product distribution and has its own loading dock,
manufacturing gas delivery system, solvent delivery and waste system, ISO 8 and ISO 7 designated customer
manufacturing suites and integrated building management systems for required site control.
We
continue to invest in our Wateridge facility with recent expansions allowing for the manufacture of plasmid
DNA and creation of ISO Class 8 and ISO Class 7 clean rooms providing for an expansion of the
scale at which we can manufacture CleanCap and NTPs, supported by a pilot plant for development of
large-scale manufacturing processes. This investment has allowed us to substantially increase our capacity
for nucleic acid production and specifically CleanCap
meeting
the demand from our customers without interruption or constraints.
In
addition to the Wateridge facility, throughout 2022 we invested in an additional facility in San Diego.
California (the “Flanders San Diego Facility”) that we expect to occupy in 2023. The new
Flanders San Diego Facility will provide us with additional GMP manufacturing capacity and provide us the
optionality downstream to manufacture materials beyond current quality requirements for mRNA raw materials,
including CleanCap. The Flanders San Diego Facility will include the introduction of integrated
manufacturing systems, quality of water improvements from Reverse Osmosis De-ionized grade water to WFI
(“Water For Injection”), which is pharmaceutical grade water, and other facility infrastructure
investments to support potential customer needs related to quality. These investments will also support an
additional increase to batch run sizes and overall throughput.
In
2022, we secured additional office, warehouse and light lab space in San Diego for the primary purpose to
relocate our sales, general and administrative employees. We also assumed a lease from our MyChem
acquisition and have repurposed the facility as a small R&D lab.
Our
Southport, North Carolina operations are engaged in the manufacture and processing of antibody and HCP ELISA
kits. The operations include laboratory, manufacturing, bottling, shipping and waste handling capabilities.
In 2023, our Southport operations will relocate to a new state-of-the-art facility in Leland, North
Carolina. This new facility more than doubles our operational square footage to support current and future
growth. The fully customized design will provide room for a Mass Spectrometry Center of Excellence and
specialized cell culture facilities. It will significantly increase our cold storage capacity while
providing other R&D, laboratory and automation upgrades. Extensive process flow analysis has been
incorporated into the facility design to optimize and enhance both our manufacturing and kit packaging
operations.
Our
Sterling, Virginia facility was designed to perform quality control, aliquoting, packaging and shipping and
houses the appropriate space and systems.
Our
supply chain relies on a network of specialized suppliers and transportation companies. We regularly review
our supply chain for supplier quality and risks related to concentration of supply and we take appropriate
action to manage these potential risks.
Government
Regulation
We
provide products used for basic research or as raw materials used by biopharmaceutical customers for further
processing, and active pharmaceutical ingredients used for preclinical and clinical studies. The quality of
our products is critical to researchers looking to develop novel vaccines and therapies and for
biopharmaceutical customers who use our products as raw materials or who are engaged in preclinical studies
and clinical trials. Biopharmaceutical customers are subject to extensive regulations by the FDA and similar
regulatory authorities in other countries for conducting clinical trials and commercializing products for
therapeutic, vaccine or diagnostic use. This regulatory scrutiny results in our customers imposing rigorous
quality requirements on us as their supplier through supplier qualification processes and customer
contracts.
Our
nucleic acid and biologics safety testing segments produce materials used in research and biopharmaceutical
production, clinical trial vaccines and vaccine support products. We produce materials in support of our
customers’ manufacturing businesses and to fulfill their validation requirements, as applicable. These
customer activities are subject to regulation and consequently require these businesses to be inspected by
the FDA and other national regulatory agencies under their respective cGMP regulations. These regulations
result in our customers imposing quality requirements on us for the manufacture of our products, and
maintain records of our manufacturing, testing and control activities. In addition, the specific activities
of some of our businesses require us to hold specialized licenses for the manufacture, distribution and/or
marketing of particular products.
All
of our sites are subject to licensing and regulation, as appropriate under federal, state and local laws
relating to:
•the
surface and air transportation of chemicals, biological reagents and hazardous materials;
•the
handling, use, storage and disposal of chemicals (including toxic substances), biological reagents and
hazardous waste;
•the
procurement, handling, use, storage and disposal of biological products for research purposes;
•the
safety and health of employees and visitors to our facilities; and
•protection
of the environment and general public.
Regulatory
compliance programs at each of our businesses are managed by a dedicated group responsible for regulatory
affairs and compliance, including the use of outside consultants. Our compliance programs are also managed
by quality management systems, such as vendor supplier programs and training programs. Within each business,
we have established Quality Management Systems (“QMS”) responsible for risk based internal audit
programs to manage regulatory requirements and client quality expectations. Our QMS program ensures that
management has proper oversight of regulatory compliance and quality assurance, inclusive of reviews of our
system practices to ensure that appropriate quality controls are in place and that a robust audit strategy
confirms requirements for compliance and quality assurance.
Research
Products
Our
products and operations may be subject to extensive and rigorous regulation by the FDA and other federal,
state, or local authorities, as well as foreign regulatory authorities. The FDA regulates, among other
things, the research, development, testing, manufacturing, clearance, approval, labeling, storage,
recordkeeping, advertising, promotion, marketing, distribution, post-market monitoring and reporting, and
import and export of pharmaceutical drugs. Certain of our products are currently marketed as research use
only (“RUO”).
We
believe that our products that are marketed as RUO products are exempt from compliance with GMP regulations
under the FDCA. RUO products cannot make any claims related to safety, effectiveness or diagnostic utility
and they cannot be intended for human clinical diagnostic use. In November 2013, the FDA issued a final
guidance on products labeled RUO, which, among other things, reaffirmed that a company may not make any
clinical or diagnostic claims about an RUO product. The FDA will also evaluate the totality of the
circumstances to determine if the product is intended for diagnostic purposes. If the FDA were to determine,
based on the totality of circumstances, that our products labeled and marketed for RUO are intended for
diagnostic purposes, they would be considered medical products that will require clearance or approval prior
to commercialization.
We
do not make claims related to safety or effectiveness and they are not intended for diagnostic or clinical
use. However, the quality of our products is critical to meeting customer needs, and we therefore
voluntarily follow the quality standards outlined by the International Organization for Standardization for
quality management systems (ISO 9001:2015) for the design,
development,
manufacture, and distribution of our products. Some biopharmaceutical customers desire extra requirements
including quality parameters and product specifications, which are outlined in customer-specific quality
agreements. These products are further processed and validated by customers for their applications.
Customers qualify us as part of their quality system requirements, which can include a supplier
questionnaire and on-site audits. Customers requalify us on a regular basis to ensure our quality system,
processes and facilities continue to meet their needs and we are meeting requirements outlined in relevant
customer agreements.
Active
Pharmaceutical Ingredients (“APIs”) for Clinical Trials
We
provide APIs to customers for use in preclinical studies through and including clinical trials. We hold a
drug manufacturing license with the California Food and Drug Branch of the California Department of Public
Health for manufacture of APIs for clinical use and are subject to inspection to maintain licensure.
Manufacture of APIs for use in clinical trials is regulated under § 501(a)(2)(B) of the FDCA, but
is not subject to the current GMP regulations in 21 CFR § 211 by operation of 21 CFR § 210.
We follow the principles detailed in the International Council for Harmonisation (“ICH”) Q7,
Good Manufacturing Practice Guide for Active Pharmaceutical Ingredients (Section 19, APIs For Use in
Clinical Trials) in order to comply with the applicable requirements of the FDCA, and the comparable GMP
principles for Europe; European Community, Part II, Basic Requirements for Active Substances Used as
Starting Materials (Section 19, APIs For Use in Clinical Trials). APIs are provided to customers under
customer contracts that outline quality standards and product specifications. As products advance through
the clinical phases, requirements become more stringent, and we work with customers to define and agree on
requirements and risks associated with their product.
Customers’
biopharmaceutical products early in their development have a high failure rate and often do not advance
through the clinical stages to commercialization. Our customers are required to follow regulatory pathways
that are not always known, which may cause additional unforeseen requirements placed on us as their contract
manufacturer and delays in advancing to the next stage of product development. We also provide novel
compounds for cell and gene therapy applications, which result in additional challenges for our customers
attempting to obtain regulatory approval given that this field is relatively new, and regulations are
evolving. Customer clinical trials rely on approval from institutional review boards (“IRBs”)
and patient and volunteer enrollment, which makes timelines unpredictable for advancing to the next stage in
product development. Preclinical studies and clinical trials conducted by our customers are also expensive
and data may be negative or inconclusive causing customers to abandon projects that were expected to
continue. Regulatory requirements in both the United States and abroad are always evolving and compliance
with future laws may require significant investment to ensure compliance.
Other
Regulatory Requirements
Environmental
laws and regulations.
We believe that our operations comply in all material respects with applicable laws and regulations
concerning environmental protection. To date, there have been no material effects upon our earnings or
competitive position resulting from our compliance with applicable laws or regulations enacted or adopted
relating to the protection of the environment. Our capital and operating expenditures for pollution
control in 2022 and 2021 were not material.
Intellectual
Property
Our
success depends in part on our ability to obtain and maintain intellectual property protection for our
products and services, defend and enforce our intellectual property rights, preserve the confidentiality of
our trade secrets, and operate without infringing, misappropriating or otherwise violating valid and
enforceable intellectual property rights of others. We seek to protect the investments made into the
development of our products and services by relying on a combination of patents, trademarks, copyrights,
trade secrets, including know-how, and license agreements. We also seek to protect our proprietary products
and services, in part, by requiring our employees, consultants, contractors and other third parties to
execute confidentiality agreements and invention assignment agreements.
Patents.
Our
intellectual property strategy is focused on protecting through patents and other intellectual property
rights our core products and services, including CleanCap, and related instrumentation and applications. In
addition, we protect our ongoing research and development into critical reagents for cell and gene therapy
through patents and other intellectual property rights. Our patent portfolio generally includes patents and
patent applications relating to compositions and methods for the production of oligonucleotides, nucleic
acids, immunofluorescence assays, and mock viral particles. We may own provisional patent applications, and
provisional patent applications are not eligible to become issued patents until, among other things, we file
national stage patent applications either directly or via the PCT within 12 or 30 to 32 months,
respectively. If we do not timely file any national stage patent applications, we may lose our priority date
with respect to our provisional patent applications and any patent protection on the inventions disclosed in
such provisional patent applications. We cannot predict whether any such patent applications will result in
the issuance of patents that provide us with any competitive advantage.
Issued
patents extend for varying periods depending on the date of filing of the patent application or the date of
patent issuance and the legal term of patents in the countries in which they are obtained. Generally,
utility patents issued for applications are granted a term of 21 years from the earliest effective filing
date of a non-provisional patent application. Issued patents may be extended beyond the natural 21 year term
for regulatory or administrative delay in accordance with provisions of applicable local law. As a result,
our patent portfolio may not provide us with sufficient rights to exclude others from commercializing
products similar or identical to ours.
The
following granted patents relate to our CleanCap products and technology.
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Patent
Number |
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Title
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Expiration
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United
States |
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10494399
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Compositions
and methods for synthesizing 5′-Capped RNAs
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2036
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United
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10519189
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Compositions
and methods for synthesizing 5′-Capped RNAs
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2036
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United
States |
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10913768C1
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Compositions
and methods for synthesizing 5′-Capped RNAs
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2036
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United
States |
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11414453
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Compositions
and methods for synthesizing 5′-Capped RNAs
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2036
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Europe
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3352584
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Compositions
and methods for synthesizing 5′-Capped RNAs
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2036
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Australia
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2016328645
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Compositions
and methods for synthesizing 5′-Capped RNAs
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2036
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Japan
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6814997
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Compositions
and methods for synthesizing 5′-Capped RNAs
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2036
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Japan
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7082174
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Compositions
and methods for synthesizing 5′-Capped RNAs
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2036
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The
following patents relate to our MockV related products and technology.
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United
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9632087
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Methods
for evaluating viral clearance from a biopharmaceutical solution employing mock viral
particles
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2034
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United
States |
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10309963
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Methods
for evaluating viral clearance from a process solution employing mock viral particles
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2034
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Europe
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3044339
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Methods
and kits for quantifying the removal of mock virus particles from a purified solution
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2034
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Australia
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2014320015
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Methods
and kits for quantifying the removal of Mock Virus Particles from a purified solution
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2034
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China
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105899684
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Methods
and kits for quantifying pseudoviral particles removed from purified solution
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2034
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Japan
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6549126
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Methods
and kits for removal of mock virus particles from a purified solution
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2034
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Trademarks.
Our trademark portfolio is designed to protect the brands of our current and future products and includes
U.S. trademark registrations for our company name, Maravai LifeSciences, subsidiary names Cygnus
Technologies and TriLink Biotechnologies and various product names, such as CleanCap and MockV.
Trade
Secrets.
We also rely on trade secrets, including know-how, unpatented technology and other proprietary information,
to strengthen our competitive position. We have determined that certain technologies, such as the production
of antibodies for biologics safety testing, are better kept as trade secrets, rather than pursuing patent
protection. To prevent disclosure of trade secrets to others, it is our policy to enter into nondisclosure,
invention assignment and confidentiality agreements with parties who have access to trade secrets, such as
our employees, collaborators, outside scientific collaborators, consultants, advisors and other third
parties. These agreements also provide that all inventions resulting from work performed for us or relating
to our business and conceived or completed during the period of employment or assignment, as applicable, are
our exclusive property. In addition, we take other appropriate precautions, such as physical and
technological security measures, to guard against misappropriation of our proprietary information by third
parties.
We
intend to pursue additional intellectual property protection to the extent we believe it would advance our
business objectives. Notwithstanding these efforts, there can be no assurance that we will adequately
protect our intellectual property or provide any competitive advantage. We cannot provide any assurance that
any patents will be issued from our pending or any future patent applications or that any issued patents
will adequately protect our products or technology. Our intellectual property rights may be invalidated,
held unenforceable, circumvented, narrowed or challenged. In addition, the laws of various foreign countries
where our products are distributed may not protect our intellectual property rights to the same extent as
laws in the United States. Furthermore, it may be difficult to protect our trade secrets. While we have
confidence in the measures we take to protect and preserve our trade secrets, they may be inadequate and can
be breached, and we may not have adequate
remedies
for violations of such measures. In addition, our trade secrets may otherwise become known or be
independently discovered by competitors. Moreover, our invention assignment agreements with employees,
collaborators, outside scientific collaborators, consultants, advisors and other third parties may not be
self-executing or otherwise provide meaningful protection for our intellectual property rights. If we do not
adequately protect our intellectual property, third parties, including our competitors, may be able to use
our technologies to produce and market products that compete with us and erode our competitive advantage.
For more information regarding risks related to intellectual property, please see Item 1A. “Risk
Factors—Risks Related to our Intellectual Property.”
Human
Capital Management
Operating
a sustainable business begins with our people. As of December 31, 2022, we had over 610 full-time
employees. Among our employees, 46% identified as female, 54% identified as male and 55% identified as
ethnically or racially diverse. Approximately 18% of our employees have earned advanced degrees and all
employees receive rigorous on the job training. None of our employees is represented by a labor union, and
none of our employees has entered into a collective bargaining agreement with us. We offer a highly
competitive compensation and benefits program to attract and retain top talent. We believe it is important
for our employees to have an ownership stake in our company, so all eligible employees receive equity awards
under our 2020 Omnibus Incentive Plan and have the opportunity to purchase stock at a discount under our
2020 Employee Stock Purchase Plan.
At
Maravai, our success hinges on our ability to attract, engage, develop and retain a talented and diverse
team who share our core values and mission to enable the miracles of science. Our talented employees drive
our mission and help shape our culture, which plays an invaluable role in our execution at all levels in our
organization. Our culture reflects our shared core values which we believe contribute to our success and the
continued growth of our organization. We use our core values in candidate screening and performance
management to help reinforce their importance in our organization.
Our
mission and core values are coded into our culture and help guide our path forward. We define our company
culture and guiding principles with a simple acronym for how we conduct ourselves and service our clients:
CODE.
•Connected
— believing in people, trust and collaboration.
•Open
— embracing ideas and perspectives for better outcomes.
•Driven
— finding a better way, always.
•Empowered
- valuing integrity and accountability in everything we do.
Our
human capital management strategy oversees culture, talent acquisition, compensation and benefits, employee
engagement, training and development, health and wellness and diversity, equity and inclusion. In 2022, we
made strategic advancements in each of these areas to help ensure our workforce is aligned with our mission
and values. For example, we implemented a new global applicant tracking system that enables us to better
organize, track and engage with candidates throughout the recruitment and hiring process. We also launched a
comprehensive, five-day orientation program for new employees called “Foundations,” which
includes informational sessions with leadership and more than twenty hours of self-directed training.
As
part of our efforts to enhance our company culture, we have dedicated personnel focused on our diversity,
equity and inclusion strategy and launched our first employee resource group, Women in Leadership, and proud
to have an executive leadership team that is 50% women. To improve the quality of our colleagues’
experience at Maravai, we measured various levels of engagement through a company-wide survey and received
an average participation rate of 91%. We use the results from our survey to develop action plans that we can
incorporate into our human capital management strategy.
As
a leading life sciences company. we are committed to the health, safety and well-being of our employees. All
employees exposed to potential hazards are required to complete annual health and safety training, including
laboratory chemical safety, hazard communication and hazardous waste management. In 2022, we continued to
strengthen our comprehensive environmental, health and safety management system, which includes an online
incident reporting platform across all company sites. Additionally, we have implemented incident
intervention services which include telemedicine for some of our locations. Through our employee assistance
program, employees and their families are offered up to three sessions with licensed counseling
professionals at no cost to the employee and have on-demand access to additional online resources.
Available
Information
Our
website is located at www.maravai.com, and our investor relations website is located at
investors.maravai.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and our Proxy Statements, and any
amendments
to these reports, are available through our investor relations website, free of charge, after we file them
with the SEC. Our filings with the SEC are also available, free of charge, on the SEC's website at
www.sec.gov. We webcast via our investor relations website our earnings calls and certain events we
participate in or host with members of the investment community. Our investor relations website also
provides notifications of news or announcements regarding our financial performance and other items that may
be material or of interest to our investors, including SEC filings, investor events, press and earnings
releases, and blogs. The contents of our website are not incorporated by reference into this Annual Report
on Form 10-K or in any other report or document we file with the SEC, and any references to our website are
intended to be inactive textual references only.
Item
1A. Risk Factors
In
addition to the other information in this report and our other filings with the SEC, you should carefully
consider the risks and uncertainties described below, which could materially and adversely affect our
business operations, financial condition and results of operations. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we
currently believe are not material, may also become important factors that affect us. You should carefully
consider the risks described below, together with the financial and other information contained in this
Annual Report on Form 10-K. If any of the following risks occur, our business, financial condition, results
of operations and prospects could be materially and adversely affected. In that event, the price of our
Class A common stock could decline, and you could lose all or part of your investment.
Summary
of Risk Factors
The
following is a summary of the risk factors our business faces. The list below is not exhaustive, and
investors should read this “Risk Factors” section in full.
•The
extent and duration of our revenue associated with COVID-19-related products and services are uncertain and
are dependent, in important respects, on factors outside our control.
•Changes
in economic conditions could negatively impact our revenue and earnings.
•Certain
of our products are used by customers in the production of vaccines and therapies, some of which represent
relatively new and still-developing modes of treatment. Unforeseen adverse events, negative clinical
outcomes, development of alternative therapies, or increased regulatory scrutiny of these and their
financial cost may damage public perception of the safety, utility, or efficacy of these vaccines and
therapies or other modes of treatment and may harm our customers’ ability to conduct their business.
Such events may negatively impact our revenue and have an adverse effect on our performance.
•We
are dependent on our customers’ spending on and demand for outsourced nucleic acid production and
biologics safety testing products and services. A reduction in spending or demand could have a material
adverse effect on our business, financial condition, results of operations, cash flows and prospects.
•We
compete with life science, pharmaceutical and biotechnology companies who are substantially larger than we
are and potentially capable of developing new approaches that could make our products, services and
technology obsolete.
•If
our products and services do not perform as expected or the reliability of the technology on which our
products and services are based in questioned, we could experience lost revenue, delayed or reduced market
acceptance of our products and services, increased costs and damage to our reputation.
•Our
products are highly complex and are subject to quality control requirements.
•Our
commercial success depends on the market acceptance of our life science reagents. Our reagents may not
achieve or maintain significant commercial market acceptance.
•Our
operating results may fluctuate significantly in the future, which makes our future operating results
difficult to predict and could cause our operating results to fall below expectations or any guidance we may
provide.
•Ongoing
geopolitical instability and the resulting economic disruption may negatively impact our business,
operations and financial condition.
•Product
liability lawsuits against us could cause us to incur substantial liabilities, limit sales of our existing
products and limit commercialization of any products that we may develop.
•Our
acquisitions expose us to risks that could adversely affect our business, and we may not achieve the
anticipated benefits of acquisitions of businesses or technologies.
•We
depend on a limited number of customers for a high percentage of our revenue. If we cannot maintain our
current relationships with customers, fail to sustain recurring sources of revenue with our existing
customers, or if we fail to enter into new relationships, our future operating results will be adversely
affected.
•We
rely on a limited number of suppliers or, in some cases, sole suppliers, for some of our raw materials and
may not be able to find replacements or immediately transition to alternative suppliers.
•Our
products could become subject to more onerous regulation by the FDA or other regulatory agencies in the
future, which could increase our costs and delay or prevent commercialization of our products, thereby
materially and adversely affecting our business, financial condition, results of operations, cash flows and
prospects.
•If
we are unable to obtain, maintain and enforce intellectual property protection for our current or future
products, or if the scope of our intellectual property protection is not sufficiently broad, our ability to
commercialize our products successfully and to compete effectively may be materially adversely affected.
•If
we fail to comply with our obligations under any license agreements, disagree over contract interpretation,
or otherwise experience disruptions to our business relationships with our licensors, we could lose
intellectual property rights that are necessary to our business.
•Our
existing indebtedness could adversely affect our business and growth prospects.
•Our
principal asset is our interest in Maravai Topco Holdings, LLC (“Topco LLC”), and, accordingly,
we depend on distributions from Topco LLC to pay our taxes and expenses, including payments under the Tax
Receivable Agreement. Topco LLC’s ability to make such distributions may be subject to various
limitations and restrictions.
•Conflicts
of interest could arise between our shareholders and Maravai Life Sciences Holdings, LLC (“MLSH
1”), which may impede business decisions that could benefit our shareholders.
•The
Tax Receivable Agreement requires us to make cash payments to MLSH 1 and Maravai Life Sciences Holdings 2,
LLC (“MLSH 2”) in respect of certain tax benefits to which we may become entitled, and we expect
that the payments we will be required to make will be substantial.
•Our
organizational structure, including the Tax Receivable Agreement, confers certain benefits upon MLSH 1 and
MLSH 2 that will not benefit the other common shareholders to the same extent as they will benefit MLSH 1
and MLSH 2.
•GTCR,
LLC (“GTCR”) controls us, and its interests may conflict with ours or yours in the future.
•Provisions
of our corporate governance documents could make an acquisition of us more difficult and may prevent
attempts by our shareholders to replace or remove our current management, even if beneficial to our
shareholders.
Risks
Related to Our Business and Strategy
The
extent and duration of our revenue associated with COVID-19 related products and services are uncertain and
are dependent, in important respects, on factors outside our control.
Certain
of our products, including our proprietary CleanCap® analogs, are used by our customers in the
production of COVID-19 vaccines. While
our results
of operations and cash flows have been positively impacted by a strong demand for our proprietary CleanCap
analogs and ongoing demand for highly modified RNA products, particularly mRNA, the
evolving nature of the COVID-19 pandemic and the resulting global public health response will affect the
continued demand for our COVID-19 related products and services, which have comprised the majority of our
revenue for the past three years. For the years ended December 31, 2022, 2021 and 2020, we estimate
that revenue from COVID-19 related products and services represented approximately 67.9%, 69.7% and 35.4%,
respectively, of our total revenues. The ongoing manufacture and supply of COVID-19 vaccines (including
bivalent booster doses) by our customers is uncertain and subject to various political, social, economic,
and regulatory factors that are outside of our control, including the duration of the pandemic; emerging
information concerning the severity and incidence of the virus and its variants; the emergence of additional
virus variants; regional resurgences of the virus globally; the rate at which the population globally
becomes vaccinated against COVID-19; the development and availability of antiviral therapeutic alternatives;
the lapsing of the public health emergency declaration made pursuant to Section 319 of the Public Health
Service Act in January 2020 with respect to the COVID-19 pandemic; and political and social debate relating
to the need for, efficacy of, or side effects related to one or more specific COVID-19 vaccines. As the
supply and manufacture of COVID-19 vaccines by our customers slows, or becomes no longer necessary,
including if COVID-19 vaccines by our customers’ competitors are determined or perceived to be more
effective, we expect that demand for our COVID-19 related products and services will significantly decrease,
which would have a material adverse effect on our revenue, results of operations and financial
condition.
Changes
in economic conditions could negatively impact our revenue and earnings.
Our
reagents are sold primarily to biopharmaceutical and academic organizations developing novel vaccines and
therapies and performing basic research. Research and development spending by our customers and the
availability of government research funding can fluctuate due to changes in available resources, mergers of
pharmaceutical and biotechnology companies, spending priorities, general economic conditions and
institutional and governmental budgetary policies. Our biologics safety testing customers are
biopharmaceutical companies, contract research organizations (“CROs”), contract development and
manufacturing organizations (“CDMOs”) and life science companies, which largely serve the
biopharmaceutical industry. Our nucleic acid production customers are largely vaccine and therapeutic drug
makers or diagnostics manufacturers, which rely in
part
on government healthcare-related policies and funding. As a result, changes in government funding for
certain research, decreases in or the imposition of limits on government spending more generally (including
as a result of the U.S. federal debt ceiling), or reductions in overall healthcare spending could negatively
impact us or our customers and, correspondingly, our sales to them. In particular, if the U.S. Congress
fails to increase the U.S. federal debt ceiling, reimbursements we are eligible to receive under the
Cooperative Agreement we entered into with the U.S. Department of Defense may be jeopardized, which would
negatively affect our business, operations and financial condition
Currently,
the U.S. and global economies are experiencing ongoing macroeconomic challenges, including labor shortages,
supply chain disruptions and historic rates of inflation, which have led to increasing interest rates,
volatility in the capital and credit markets, and fiscal and monetary policy uncertainty. Our business
operations, as well as our customers’ and suppliers’ business operations, have been impacted,
and are expected to continue to be impacted, by these negative conditions. In particular, labor shortages
and wage inflation have affected our ability to hire, develop and retain our talented and diverse workforce,
to maintain performance levels (especially cost and schedule), and to maintain our corporate culture.
Further, if our raw material and other laboratory material suppliers experience operational challenges as a
result of labor shortages, limited material availability, logistics delays and transportation capacity
constraints, or are unable to access adequate capital to support their working capital requirements, they
may be unable to provide raw materials or other laboratory materials to us in a timely manner or at a
reasonable cost, which could adversely affect our profit margins and results of operations.
Additionally,
demand for our products and services could be adversely impacted if these ongoing macroeconomic challenges
cause customers to reduce their operating budgets, adversely impact our customers’ ability to commit
funds to purchase our products, or otherwise cause customers to delay, cancel, decrease or forego purchases
of our products and services. Further, since the majority of our customers’ contracts can be
terminated, delayed or reduced in scope upon short notice or no notice, this may require us to carry excess
inventory to manage through unevenness in order activity and lead to unanticipated fluctuations in our
quarterly revenue and earnings. If we are not able to forecast and adequately manage through changes in our
customers’ order requirements, our productivity, profitability, results of operations, cash flows and
financial position could be negatively impacted. Further deterioration or a protracted extension of these
negative macroeconomic conditions, a potential economic downturn or recession, or a significant reduction or
delay in governmental funding as a result of U.S. federal budget issues, or the perception that any of these
events may occur, could cause a decline in demand for our products and services and adversely affect our
performance and result in declines in our revenue and earnings.
Certain
of our products are used by customers in the production of vaccines and therapies, some of which represent
relatively new and still-developing modes of treatment. Unforeseen adverse events, negative clinical
outcomes, or increased regulatory scrutiny of these and their financial cost may damage public perception of
the safety, utility, or efficacy of these vaccines and therapies or other modes of treatment and may harm
our customers’ ability to conduct their business. Such events may negatively impact our revenue and
have an adverse effect on our performance.
Gene
therapy and nucleic acid vaccines remain relatively new and are under active development, with only a few
gene therapies and nucleic acid vaccines, including those for COVID-19, approved to date by regulatory
authorities. Public perception may be influenced by claims that gene therapy or nucleic acid vaccines are
unsafe or ineffective, and gene therapy may not gain the acceptance of the public or the medical community.
Following the release of nucleic acid COVID-19 vaccines, including those that incorporate our CleanCap®
products, segments of the population have criticized their safety and efficacy impacting vaccine demand. In
addition, ethical, social, legal and financial concerns about gene therapy and nucleic acid vaccines,
including COVID-19 vaccines, could result in additional regulations or limitations or even prohibitions on
certain gene therapies or vaccine-related products. Our customers’ use of our products and services in
therapeutic and vaccine development programs for other (non-COVID-19-related) indications could be impacted
by more restrictive regulations or negative public perception, which could negatively affect our business
prospects, revenue and results of operation.
We
are dependent on our customers’ spending on and demand for outsourced nucleic acid production and
biologics safety testing products and services. A reduction in spending or demand could have a material
adverse effect on our business, financial condition, results of operations, cash flows and prospects.
The
success of our business depends primarily on the number and size of contracts with our customers, primarily
pharmaceutical and biotechnology companies, for our products and services. As discussed above, during the
COVID-19 pandemic we benefited from a significant increase in demand for our products and service, including
our proprietary CleanCap® analogs that are used by our customers in the production of COVID-19
vaccines, and more generally, as a result of the continued growth of the global biologics market, increasing
research and development budgets of our customers and a greater degree of outsourcing by our customers. A
slowing or reversal of any of these trends, including a decrease in the amount of COVID-19 vaccines
manufactured or supplied by our customers, could have a significant adverse effect on the demand for our
products and services.
In
addition to these industry trends, our customers’ willingness and ability to utilize our products and
services are also subject to, among other things, their own financial performance, changes in their
available resources, their decisions to acquire in-house manufacturing capacity, their spending priorities,
their budgetary policies and practices and their need to develop new biological products, which, in turn,
are dependent upon a number of factors, including their competitors’ discoveries, developments and
commercial manufacturing initiatives and the anticipated market, clinical and reimbursement scenarios for
specific products and therapeutic areas. In addition, consolidation in the industries in which our customers
operate may have an impact on our customers’ spending as they integrate acquired operations, including
research and development departments and associated budgets. If our customers reduce their spending on our
products and services as a result of any of these or other factors, our business, financial condition,
results of operations, cash flows and prospects would be materially and adversely affected.
We
compete with life science, pharmaceutical and biotechnology companies who are substantially larger than we
are and potentially capable of developing new approaches that could make our products, services and
technology obsolete.
The
market for pharmaceutical, reagent, therapeutic and diagnostic products and services is intensely
competitive, rapidly evolving, significantly affected by new product introductions and other market
activities by industry participants and subject to rapid technological change. We also expect increased
competition as additional companies enter our market and as more advanced technologies become available. We
compete with other providers of outsourced biologics products and services. We also compete with the
in-house discovery, development and commercial manufacturing functions of pharmaceutical and biotechnology
companies. Many of our competitors are large, well-capitalized companies with significantly greater
resources and market share than we have. As a consequence, these competitors are able to spend more
aggressively on product and service development, marketing, sales and other initiatives than we can. Many of
these competitors also have:
•broader
name recognition;
•longer
operating histories and the benefits derived from greater economies of scale;
•larger
and more established distribution networks;
•additional
product and service lines and the ability to bundle products and services to offer higher discounts or other
incentives to gain a competitive advantage;
•more
experience in conducting research and development, manufacturing and marketing;
•more
experience in entering into collaborations or other strategic partnership arrangements; and
•more
financial, manufacturing and human resources to support product development, sales and marketing and patent
and other intellectual property litigation.
These
factors, among others, may enable our competitors to market their products and services at lower prices or
on terms more advantageous to customers than we can offer. Competition may result in price reductions,
reduced gross margins and loss of market share, any of which could have a material adverse effect on our
business, financial condition, results of operations, cash flows and prospects. Additionally, our current
and future competitors, including certain of our customers, may at any time develop additional products and
services that compete with our products and services and new approaches by these competitors may make our
products, services, technologies and methodologies obsolete or noncompetitive. We may not be able to compete
effectively against these organizations.
In
addition, to develop and market our new products, services, technologies and methodologies successfully, we
must accurately assess and meet customers’ needs, make significant capital expenditures, optimize our
development and manufacturing processes to predict and control costs, hire, train and retain the necessary
personnel, increase customer awareness and acceptance of our services, provide high-quality services in a
timely manner, price our products and services competitively and effectively integrate customer feedback
into our business planning. If we fail to create demand for our new products, services or technologies, our
future business could be harmed.
If
our products and services do not perform as expected or the reliability of the technology on which our
products and services are based is questioned, we could experience lost revenue, delayed or reduced market
acceptance of our products and services, increased costs and damage to our reputation.
Our
success depends on the market’s confidence that we can provide reliable, high-quality life science
reagents. We believe that customers in our target markets are likely to be particularly sensitive to product
defects and errors. Our reputation and the public image of our products, services and technologies may be
impaired if our products or services fail to perform as expected.
Although
our products are tested prior to shipment, defects or errors could nonetheless occur. Our operating results
depend on our ability to execute and, when necessary, improve our quality management strategy and systems
and our ability to effectively
train
and maintain our employee base with respect to quality management. A failure of our quality control systems
could result in problems with facility operations or preparation or provision of products. In each case,
such problems could arise for a variety of reasons, including equipment malfunction, failure to follow
specific protocols and procedures, problems with raw materials or environmental factors and damage to, or
loss of, manufacturing operations. Such problems could affect production of a particular batch or series of
batches of products, requiring the destruction of such products or a halt of facility production altogether.
Furthermore, some of the products that we manufacture are subsequently incorporated into products that are
sold by other life sciences companies and we have no control over the manufacture and production of those
products.
In
addition, in the event we, or our suppliers, fail to meet required quality standards and if our products
experience, or are perceived to experience, a material defect or error, our products could be recalled or we
may be unable to timely deliver products to our customers, which in turn could damage our reputation for
quality and service. In the past, certain of our custom mRNA and CleanCap reagent products have been sold
with insufficient capping efficiency or with incorrect transcription instructions. Additionally, several
lots of our host cell protein (“HCP”) enzyme-linked immunosorbent assay (“ELISA”)
biologics safety testing kits have experienced a possible instability drift and decrease in accuracy.
Although we have taken steps to improve our quality review, product documentation and reference testing
procedures, we cannot guarantee that we will not experience quality assurance issues with our products in
the future. Any such failure could, among other things, lead to increased costs, delayed or lost revenue,
delayed market acceptance, damaged reputation, diversion of development resources, legal claims,
reimbursement to customers for lost drug product, starting materials and active pharmaceutical ingredients,
other customer claims, damage to and possibly termination of existing customer relationships, increased
insurance costs, time and expense spent investigating the cause and, depending on the cause, similar losses
with respect to other batches or products, any of which could harm our business, financial condition,
results of operations, cash flows and prospects. Such defects or errors could also narrow the scope of the
use of our products, which could hinder our success in the market.
Even
after any underlying concerns or problems are resolved, any lingering concerns in our target markets
regarding our technology or any manufacturing defects or performance errors in our products or services
could continue to result in lost revenue, delayed market acceptance, damage to our reputation and claims
against us.
In
addition, we may be unable to maintain the quality, reliability, robustness and expected turnaround times of
our products and services to continue to satisfy customer demand as we grow. To effectively manage our
growth, we must continue to improve our operational, manufacturing and quality control systems and processes
and other aspects of our business and continue to effectively expand, train and manage our personnel. The
time and resources required to improve our existing systems and procedures, implement new systems and
procedures and to adequately staff such existing and new systems and procedures is uncertain, and failure to
complete this in a timely and efficient manner could adversely affect our operations and negatively impact
our business and financial results. We may need to purchase additional equipment, some of which can take
several months or more to procure, set up and validate, establish new production processes and increase our
personnel levels to meet increased demand. There can be no assurance that any of these increases in scale,
personnel expansion or equipment or process enhancements will be successfully implemented, or that we will
have adequate space, including in our laboratory and production facilities, to accommodate such required
expansion. Failure to manage this growth or transition could result in delays in turnaround times, higher
product costs, declining product quality, deteriorating customer service and slower responses to competitive
challenges. A failure in any one of these areas could make it difficult for us to meet market expectations
for our products and services and could damage our reputation and our business, financial condition, results
of operations, cash flows and prospects could be adversely affected.
Our
products are highly complex and are subject to quality control requirements.
Whether
a product is produced by us or purchased from outside suppliers, it is subject to quality control
procedures, including the verification of stability and performance and, for certain products, additional
validation required by certain GMP that we voluntarily follow, European Conformity (“CE”)
marking and ISO 9001:2015 compliance, prior to final packaging. Certain of our products are manufactured
following the voluntary GMP quality standards of the International Council for Harmonisation’s GMP
Guide, comparable GMP principles for the European Union and customer-specific requirements. We believe these
products are exempt from compliance with the Food, Drug, and Cosmetic Act (“FDCA”) and the
current GMP (“cGMP”) regulations of the Food and Drug Administration (“FDA”), as our
products are further processed and incorporated into final drug products by our customers and we do not make
claims related to their safety or effectiveness. In the event we, or our suppliers, produce products that
fail to comply with required quality standards, we may incur delays in fulfilling orders, write-downs,
damages resulting from product liability claims and harm to our reputation.
Our
operating results may fluctuate significantly in the future, which makes our future operating results
difficult to predict and could cause our operating results to fall below expectations or any guidance we may
provide.
Our
quarterly and annual operating results may fluctuate significantly, which makes it difficult for us to
predict our future operating results. These fluctuations may be driven by a variety of factors, many of
which are outside of our control, including, but not limited to:
•demand
from our largest customers for COVID-19-related products and services (which currently comprise a
significant percentage of our revenue and orders) may not meet our expectations regarding volume and price
in any given time period;
•the
level of demand for our other (non-COVID-19-relate) products and services, which may vary
significantly;
•our
ability to increase penetration in our existing markets and expand into new markets;
•our
customers accelerating, canceling, reducing or delaying orders as a result of developments related to their
pre-clinical studies and clinical trials;
•the
relative reliability and robustness of our products and services;
•changes
in governmental regulations or the regulatory posture toward our business;
•the
volume and mix of the products and services we sell;
•changes
in the production or sales costs related to our products and services;
•the
ongoing success of our newer products, such as our CleanCap® and mRNA products;
•
the rate of introduction of other new products or product enhancements by us or others in our
industry;
•the
timing and amount of expenditures that we may incur to acquire, develop or commercialize additional
products, services and technologies or for other purposes, such as the expansion of our facilities;
•changes
in governmental and academic funding of life sciences research and developments or changes that impact
budgets, budget cycles or seasonal spending patterns of our customers;
•future
accounting pronouncements or changes in our accounting policies;
•difficulties
encountered by our commercial carriers in delivering our products, whether as a result of external factors
such as weather or negative macroeconomic conditions or internal issues such as labor disputes;
•general
market conditions and other factors outside of our control, such as natural disasters, geopolitical unrest,
war, terrorism, public health issues (including the ongoing COVID-19 pandemic) or other catastrophic events;
and
•the
other factors described in this “Risk Factors” section.
The
impact of any one of the factors discussed above, or the cumulative effects of a combination of such
factors, could result in significant fluctuations and unpredictability in our quarterly and annual operating
results. As a result, comparisons of our operating results on a period-to-period basis may not be
meaningful. Investors should not rely on our past results as an indication of our future performance.
As
a result of variability and unpredictability, we may also fail to meet the expectations of industry or
financial analysts or investors for any period. If our revenue or operating results fall short of the
expectations of analysts or investors or any guidance we may provide, or if the guidance we provide falls
short of the expectations of analysts or investors, the price of our Class A common stock could decline
substantially. Such a stock price decline could occur even when we have met or exceeded any previously
publicly stated guidance we may have provided.
If
we are unable to manufacture in specific quantities, our operating results will be harmed.
Our
revenue and other operating results depend in large part on our ability to manufacture and ship our products
in sufficient quantities. Any interruptions we experience in the manufacturing or shipping of our products
could delay our ability to recognize revenue in a particular quarter. Manufacturing problems can and do
arise, and as demand for our products increases, any such problems could have an increasingly significant
impact on our operating results. While we have not generally experienced problems with, or delays in, our
production capabilities that resulted in delays in our ability to ship finished products, there can be no
assurance that we will not encounter such problems in the future. We may not be able to quickly ship
products and recognize anticipated revenue for a given period if we experience significant delays in the
manufacturing process. In addition, we must maintain sufficient production capacity in order to meet
anticipated customer demand, and we may be unable to offset the associated fixed costs if orders slow, which
would adversely affect our operating margins. If we are unable
to
manufacture and ship our products consistently, in sufficient quantities and on a timely basis, our revenue,
cash flow, gross margins and our other results of operations will be materially and adversely
affected.
A
pandemic, epidemic, or outbreak of an infectious disease, such as COVID-19, has affected, and may continue
to affect our business, financial condition, results of operations, cash flows and prospects.
The
COVID-19 pandemic led to the implementation of various responses, including government imposed
shelter-in-place orders, quarantines, travel restrictions and other public health safety measures, as well
as reported adverse impacts on healthcare resources, facilities and providers across the United States and
in other countries. In response to the spread of COVID-19, we restricted access to our facilities mostly to
personnel and third parties required to perform critical activities that must be completed on-site, limited
the number of such personnel that can be present at our facilities at any one time, and requested that many
of our personnel work remotely. In the event that government authorities are willing to reimplement
restrictions in response to a new variant of concern or increased infection rates, our employees conducting
research and development or manufacturing activities may not be able to access our laboratory or
manufacturing facilities and our core activities may be significantly limited or curtailed, possibly for an
extended period of time.
As
a result of the COVID-19 pandemic, or similar pandemics and outbreaks that may occur in the future, we have
experienced and may in the future experience severe disruptions, including:
•interruption
of or delays in receiving products and supplies from the third parties we rely on to, among other things,
manufacture components to our products, due to staffing shortages, production slowdowns or stoppages and
disruptions in delivery systems, which may impair our ability to manufacture and sell our products and
services;
•limitations
on our business operations by the local, state or federal government that could impact our ability to
manufacture, sell or deliver our products and services;
•on-site
visit limitations and prohibitions imposed by customers that could impact our ability to engage in pre-sales
activities, and to provide post-sale activities, such as training, service and support;
•delays
in customers’ purchasing decisions and negotiations with customers and potential customers;
•business
disruptions caused by workplace, laboratory and office closures and an increased reliance on employees
working from home, travel limitations, cyber security and data accessibility limits, or communication or
mass transit disruptions;
•limitations
on employee resources that would otherwise be focused on the conduct of our activities, including because of
sickness of employees or their families or the desire of employees to avoid contact with large groups of
people;
•reductions
in productivity of our customers in certain countries or regions due to government-mandated shutdowns and
quarantines, such as China’s Zero Covid Policy; and
•increased
competition as quarantines and shelter-in-place orders are lifted by governments in regions where our
competitors, particularly international competitors, are located.
Any
of these factors could severely impact our research and development activities, manufacturing business
operations and sales or delay necessary interactions with local regulators, third-party vendors and other
important contractors and customers.
The
extent to which the current or any future pandemic may negatively impact our consolidated operations and
results of operations or those of our third-party manufacturers, suppliers, partners or customers continues
depend on future developments. The
factors that could cause such adverse impact include: the severity and duration of the pandemic; the
emergence of new virus variants; lack of demand for vaccines; the U.S. economy and global economy, including
impacts resulting from supply chain constraints and inflationary pressures; and the timing, scope and
effectiveness of U.S. and international governmental, regulatory, fiscal, monetary and public health
responses to such pandemic and associated economic disruptions.
Ongoing
geopolitical instability has resulted in economic disruption and uncertainty, which may negatively impact
our business, operations, and financial condition.
Russia’s
military invasion of Ukraine in late February 2022 further exacerbated ongoing inflationary pressures,
supply chain issues, and volatility in credit and capital markets, and caused other market disruptions.
Additionally, the United States, the European Union and other countries have levied sanctions against Russia
and certain other countries, regions, and individuals as a result of Russia’s military actions in
Ukraine, and Russian has imposed its own sanctions and threatened further retaliatory actions. The
aforementioned factors have caused damage and disruption to international commerce and the global economy,
and a protracted conflict between Russian and Ukraine, any escalation of said conflict (including the spread
of the conflict to
other
countries in Europe), or additional geopolitical turmoil (such as a further degradation of China-Taiwan
relations or trade relations between China and the United States), could worsen economic and financial
markets and international relations.
Such
geopolitical instability could create supply disruptions and logistics restrictions that increase our costs,
have a detrimental effect on our ability to manufacture, sell and ship our products, and impede our ability
to collect payments and support customers in certain regions. Furthermore, the global economy and financial
and capital markets could also be further adversely affected, resulting in instability and lack of liquidity
in capital markets, which could also negatively impact the value of our stock or our ability to obtain
equity or debt funding.
In
addition, there are other challenges, difficulties, and risks with respect to the way we conduct our
business and operations, generally, that we may experience as a result of continued or increased
geopolitical turmoil. For example, the ongoing Russia-Ukraine military conflict may create an increased risk
of cybersecurity attacks, including by or at the direction of the Russian government, in response to
financial and economic sanctions and import and/or export controls imposed on Russia by the United States
and others. While at this time, to the best of our knowledge, we do not believe we have experienced any such
cyberattacks, we may not be able to address any such cybersecurity threats proactively or implement adequate
preventative measures, and prompt detection and remediation of any such disruption or security breach may be
difficult, if not impossible.
The
foregoing factors could negatively affect our business, operations and financial condition, though we are
unable to predict the extent or nature of any such impacts at this time. Any such disruptions may also
increase the impact of other risks described herein, both with respect to their severity and
frequency.
Natural
disasters, geopolitical unrest, war, terrorism, public health issues or other catastrophic events could
disrupt the supply, delivery or demand of products and services, as well as our sites, which could
negatively affect our operations and performance.
We
are subject to the risk of disruption by earthquakes, hurricanes, floods and other natural disasters, fire,
power shortages, geopolitical unrest, war, terrorist attacks and other hostile acts, public health issues,
epidemics or pandemics, such as the COVID-19 pandemic, and other events beyond our control and the control
of the third parties on which we depend. Any of these catastrophic events, whether in the United States or
abroad, may have a significant negative impact on the global economy, our employees, facilities, partners,
suppliers, distributors or customers, and could decrease demand for our products and services, create delays
and inefficiencies in our supply chain and make it difficult or impossible for us to deliver products and
services to our customers.
We
rely upon our internal manufacturing, packaging and distribution operations to produce many of the products
we sell and our warehouse facilities to store products pending sale. Any significant disruption of those
operations for any reason, such as labor disputes or social unrest, power interruptions, fire, hurricanes, a
pandemic (including the ongoing COVID-19 pandemic), earthquakes or other events beyond our control, could
adversely affect our sales and customer relationships and therefore adversely affect our business and
results of operations. We have significant operations in California, near major earthquake faults, which
make us susceptible to earthquake risk.
In
addition, a catastrophic event that results in damage to specific equipment that would be difficult to
replace, the destruction or disruption of our research and production facilities or our critical business or
information technology systems would severely affect our ability to conduct normal business operations and,
as a result, our operating results would be adversely affected.
Strategic
transactions or acquisitions may require us to seek additional financing, which we may not be able to secure
on favorable terms, if at all.
We
plan to continue a strategy of growth and development for our business. To this end, we actively evaluate
various strategic transactions on an ongoing basis, including licensing or acquiring complementary products,
technologies or businesses that would complement our existing portfolio of products and services. In order
to complete such strategic transactions, we may need to seek additional financing to fund these investments
and acquisitions. Should we need to do so, we may not be able to secure such financing, or obtain such
financing on favorable terms, for reasons including rising interest rates and continued volatility and
uncertainty in the U.S. and global capital and credit markets. Our credit agreement also contains a number
of restrictive covenants that impose significant restrictions on our ability to make acquisitions or certain
other investments, as well as to incur additional indebtedness to finance such acquisitions or other
investments. In addition, future acquisitions may require the issuance or sale of additional equity, or
equity-linked securities, which may result in additional dilution to our shareholders.
If
we are unable to continue to hire and retain skilled personnel, we will have trouble developing and
marketing our products and services.
Our
success depends largely upon the continued service of our management and scientific staff and our ability to
attract, retain and motivate highly skilled technical, scientific, management and marketing personnel, who
deliver high-quality and timely services to our customers and keep pace with cutting-edge technologies and
developments in biologics. We face significant competition in the hiring and retention of such personnel
from other companies, other providers of outsourced biologics services, research and academic institutions,
government and other organizations who have superior funding and resources and who may use these resources
to pursue personnel more aggressively than we are. Additionally, certain highly skilled personnel that we
seek to employ may be subject to non-competition or other restrictive covenants restricting their ability to
work for us or within certain aspects of our business for a period of time. Although some jurisdictions
(including the State of California) prohibit non-competition agreements as a matter of law, and the U.S.
Federal Trade Commission has issued a notice of proposed rulemaking that would prohibit employers in the
U.S. from using non-compete agreements, if we hire certain employees from competitors or other companies,
those former employers may attempt to assert that these employees and/or we have breached certain legal
obligations, resulting in a diversion of our time and resources.
We
have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and
retaining employees with appropriate qualifications. In recent years, recruiting, hiring and retaining
employees with expertise in our industry and in the geographies where we operate has become increasingly
difficult as the demand for skilled professionals has increased and as a result of labor shortages believed
to have resulted from actions taken during the onset of the COVID-19 pandemic, but which are expected to
continue beyond the near-term. The loss of key personnel or our inability to hire and retain skilled
personnel could materially adversely affect the development of our products and services and our business,
financial condition, results of operations, cash flows and prospects.
Our
commercial success depends on the market acceptance of our life science reagents. Our reagents may not
achieve or maintain significant commercial market acceptance.
Our
commercial success is dependent upon our ability to continue to successfully market and sell our life
science reagents. Our ability to achieve and maintain commercial market acceptance of our products and
services and provide customers access to our life science reagents will depend on a number of factors,
including:
•our
ability to increase awareness of the capabilities of our technology and solutions;
•our
customers’ willingness to adopt new products, services and technologies;
•whether
our products and services reliably provide advantages over legacy and other alternative technologies and are
perceived by customers to be cost effective;
•our
ability to execute on our strategy to scale-up our CleanCap technology to meet increasing demand and provide
channels to access our CleanCap technology and life science reagents;
•the
rate of adoption of our products and services by biopharmaceutical companies, academic institutions and
others;
•the
relative reliability and robustness of our products and services as a whole and the components of our life
science offerings, including, for example, CleanCap and our assays for detecting host cell proteins;
•our
ability to develop new tools and solutions for customers;
•whether
competitors develop and commercialize products and services that provide comparable features and benefits at
scale;
•the
impact of our investments in product innovation and commercial growth;
•negative
publicity regarding our or our competitors’ products resulting from defects or errors; and
•our
ability to further validate our technology through research and accompanying publications.
We
cannot assure you that we will be successful in addressing these criteria or other criteria that might
affect the market acceptance of our products and services. If we are unsuccessful in achieving and
maintaining market acceptance of our products and services, our business, financial condition, results of
operations, cash flows and prospects could be adversely affected.
The
market may not be receptive to our new products and services upon their introduction.
We
expect a portion of our future revenue growth to come from introducing new products, including plasmid DNA
and GMP-grade mRNA. The commercial success of all of our products and services will depend upon their
acceptance by the life science and biopharmaceutical industries. Some of the products and services that we
are developing are based upon new technologies or
approaches.
As a result, there can be no assurance that these new products and services, even if successfully developed
and introduced, will be accepted by customers. If customers do not adopt our new products, services and
technologies, our results of operations may suffer and, as a result, the market price of our Class A common
stock may decline.
It
may be difficult for us to implement our strategies for revenue growth in light of competitive
challenges.
We
face significant competition across many of our product lines. In addition, consolidation trends in the
pharmaceutical, biotechnology and diagnostics industries have served to create fewer customer accounts and
to concentrate purchasing decisions for some customers, resulting in increased pricing pressure on us.
Moreover, customers may believe that larger companies are better able to compete as sole source vendors, and
therefore prefer to purchase from such businesses. Failure to anticipate and respond to competitors’
actions may impact our future revenue and profitability.
Our
estimates of market opportunity and forecasts of market growth may prove to be inaccurate, and even if the
market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates,
if at all.
Addressable
market estimates and growth forecasts are subject to significant uncertainty and are based on assumptions
and estimates that may not prove to be accurate. These estimates and forecasts are based on a number of
complex assumptions and third-party estimates and other business data, including assumptions and estimates
relating to our ability to generate revenue from existing products and services and the development of new
products and services. Our estimates and forecasts relating to the size and expected growth of our markets
may prove to be inaccurate. Even if the markets in which we compete meet our size estimates and growth
forecasts, our business could fail to grow at the rate we anticipate, if at all.
Product
liability lawsuits against us could cause us to incur substantial liabilities, limit sales of our existing
products and limit commercialization of any products that we may develop.
Our
business exposes us to the risk of product liability claims that are inherent in the development,
production, distribution, and sale of biotechnology products. We face an inherent risk of product liability
exposure related to the use of certain of our products in our customers’ human clinical trials and
product liability lawsuits may allege that our products or services identified inaccurate or incomplete
information or otherwise failed to perform as designed. We may also be subject to liability for errors in, a
misunderstanding of or inappropriate reliance upon, the information we provide in the ordinary course of our
business activities. If any of our products harm people due to our negligence, willful misconduct, unlawful
activities or material breach, or if we cannot successfully defend ourselves against claims that our
products caused injuries, we could incur substantial liabilities. Regardless of merit or eventual outcome,
liability claims may result in the following, any of which could impact our business, financial condition,
results of operations, cash flows and prospects:
•decreased
demand for our products and any products that we may develop;
•injury
to our reputation;
•costs
to defend the related litigation;
•loss
of revenue; and
•the
inability to commercialize products that we may develop.
We
maintain product liability insurance, but this insurance is subject to deductibles, limits and exclusions
and may not fully protect us from the financial impact of defending against product liability claims or the
potential loss of revenue that may result. Any product liability claim brought against us, with or without
merit, could increase our insurance rates or prevent us from securing insurance coverage in the
future.
We
may be unable to efficiently manage growth as a larger and more geographically diverse organization.
Our
strategic acquisitions, the continued expansion of our commercial sales operations and our organic growth
have increased the scope and complexity of our business. As a result, we will face challenges inherent in
efficiently managing a more complex business with an increased number of employees over large geographic
distances, including the need to implement appropriate systems, policies, benefits and compliance programs.
Our inability to manage successfully the geographically more diverse and substantially larger combined
organization could materially adversely affect our operating results.
Opportunistic
acquisitions may pose risks and challenges that could adversely affect our business, and we may not achieve
the anticipated benefits of acquisitions of businesses or technologies.
We
have made in the past, and may make in the future, selected opportunistic acquisitions of complementary
businesses, products, services or technologies. In January 2022, we acquired MyChem LLC, a provider of
proprietary, ultra-pure
nucleotides
to customers in the diagnostics, pharma, genomics and research markets to complement our nucleic acid
business and in January 2023, we completed the acquisition of Alphazyme, LLC, an original equipment
manufacturer provider of custom molecular biology enzymes, servicing customers in the genetic analysis and
nucleic acid synthesis markets to complement our nucleic acid production business. However, we may be unable
to continue to identify or complete promising acquisitions for many reasons, including competition among
buyers, the high valuations of businesses in our industry, the need for regulatory and other approvals and
the availability of capital, particularly during a period of disruption and volatility within the global
capital and credit markets.
Any
acquisition involves numerous risks, uncertainties and operational, financial, and managerial challenges,
including the following, any of which could adversely affect our business, financial condition, results of
operations, cash flows and prospects:
•difficulties
in integrating new operations, systems, technologies, products, services and personnel of acquired
businesses effectively and in a timely manner;
•difficulties
in implementing and maintaining controls, procedures and policies with respect to our financial accounting
systems, including disclosure controls and procedures and internal control over financial reporting, at
acquired businesses that, prior to the acquisition, had lacked such controls, procedures and
policies;
•lack
of synergies or the inability to realize expected synergies and cost-savings, including enhanced revenue,
technology, human resources, cost savings, operating efficiencies and other synergies;
•difficulties
in obtaining and verifying the financial statements and other business information of acquired
businesses;
•difficulties
in managing geographically dispersed operations, including risks associated with entering new or foreign
markets in which we have no or limited prior experience;
•underperformance
of any acquired technology, product, or business relative to our expectations and the price we paid;
•negative
near-term impacts on financial results after an acquisition, including acquisition-related earnings
charges;
•the
potential loss of key employees, customers, contractual relationships, and strategic partners of acquired
companies;
•declining
employee morale and retention issues affecting employees of businesses that we acquire, which may result
from changes in compensation, or changes in management, reporting relationships, future prospects or the
direction of the acquired business;
•claims
by terminated employees and shareholders of acquired companies or other third parties related to the
transaction;
•the
assumption or incurrence of historical liabilities, obligations and expenses of the acquired business,
including unforeseen and contingent or similar liabilities that are difficult to identify or accurately
quantify, or other litigation-related liabilities and regulatory actions;
•the
assumption or incurrence of additional debt obligations or expenses, or use of substantial portions of our
cash;
•the
issuance of equity or equity-linked securities to finance or as consideration for any acquisitions that
dilute the ownership of our shareholders;
•the
issuance of equity securities to finance or as consideration for any acquisitions may not be an option if
the price of our Class A common stock is low or volatile which could preclude us from completing any such
acquisitions;
•the
assumption of certain collaboration, strategic alliance and licensing arrangement may require us to
relinquish valuable rights to our technologies or products, or grant licenses on terms that are not
favorable to us;
•disruption
of our ongoing operations, diversion of management’s attention and company resources from existing
operations of the business, and the dedication of significant efforts and expense across all operational
areas, including sales and marketing, research and development, manufacturing, finance, legal and
information technologies;
•the
impairment of intangible assets as a result of technological advancements, or worse-than-expected
performance of acquired companies;
•the
need to later divest acquired assets at a loss if an acquisition does not meet our expectations;
•risks
associated with acquiring intellectual property, including potential disputes regarding acquired
companies’ intellectual property; and
•difficulties
relating to operating with increased leverage and incurring additional interest expense as a result of
financing acquisitions with additional indebtedness, which could make us more vulnerable to
downturns.
There
can be no assurance we will identify promising acquisition opportunities. Even if we do, there can be no
assurance that any of the acquisitions we have made, or that we may make, will be successful or will be, or
will remain, profitable. Our failure to successfully address the foregoing risks may prevent us from
achieving the anticipated benefits from any past or future acquisition in a reasonable time frame, or at
all.
Our
ability to use net operating loss and tax credit carryforwards and certain built-in losses to reduce future
tax payments is limited by provisions of the Internal Revenue Code, and it is possible that changes in laws
or certain transactions or a combination of certain transactions may result in material additional
limitations on our ability to use our net operating loss and tax credit carryforwards.
Sections
382 and 383 of the Internal Revenue Code of 1986, as amended, contain rules that limit the ability of a
company that undergoes an ownership change, which is generally any change in ownership of more than 50% of
its stock over a three-year period, to utilize its net operating loss and tax credit carryforwards and
certain built-in losses recognized in years after the ownership change. These rules generally operate by
focusing on ownership changes involving stockholders owning directly or indirectly 5% or more of the stock
of a company and any change in ownership arising from a new issuance of stock by the company. Generally, if
an ownership change occurs, the yearly taxable income limitation on the use of net operating loss and tax
credit carryforwards and certain built-in losses is equal to the product of the applicable long-term,
tax-exempt rate and the value of the company’s stock immediately before the ownership change. As a
result, following any such ownership change, we might be unable to offset our taxable income with losses, or
our tax liability with credits, before such losses and credits expire, in which event we could incur larger
federal and state income tax liabilities than we would have had we not experienced an ownership change. In
addition, under the 2017 Tax Cuts and Jobs Act (“TCJA”), tax losses generated in taxable years
beginning after December 31, 2017 may be utilized to offset no more than 80% of taxable income annually. On
March 27, 2020, the Coronavirus Aid Relief, and Economic Security Act (“CARES Act”) was signed
into law and changed certain provisions of the TCJA. Under the CARES Act, NOLs arising in taxable years
beginning after December 31, 2017 and before January 1, 2021 may be carried back to each of the five taxable
years preceding the tax year of such loss, but NOLs arising in taxable years beginning after December 31,
2020 may not be carried back. In addition, the CARES Act eliminates the limitation on the deduction of NOLs
to 80% of current year taxable income for taxable years beginning before January 1, 2021, but the 80%
limitation applies to tax years beginning after December 31, 2020. As such, we may not be able to realize a
tax benefit from the use of our NOLs.
We
may be required to record a significant charge to earnings if our goodwill and other amortizable intangible
assets, or other investments become impaired.
We
are required under U.S. generally accepted accounting principles (“GAAP”) to test goodwill for
impairment at least annually and to review our goodwill, amortizable intangible assets and other assets
acquired through merger and acquisition activity for impairment when events or changes in circumstance
indicate the carrying value may not be recoverable. Factors that could lead to impairment of goodwill,
amortizable intangible assets and other assets acquired via acquisitions include significant adverse changes
in the business climate and actual or projected operating results (affecting our company as a whole or
affecting any particular segment) and declines in the financial condition of our business. We may be
required in the future to record additional charges to earnings if our goodwill, amortizable intangible
assets or other investments become impaired. Any such charge would adversely impact our consolidated
financial results.
Changes
in accounting principles and guidance could result in unfavorable accounting charges or effects.
We
prepare our consolidated financial statements in accordance with GAAP. These principles are subject to
interpretation by the SEC and various bodies formed to create and interpret appropriate accounting
principles and guidance. A change in these principles or guidance, or in their interpretations, may have a
material effect on our reported results, as well as our processes and related controls, and may
retroactively affect previously reported results.
Our
revenue recognition and other factors may impact our financial results in any given period and make them
difficult to predict.
We
recognize revenue when our performance obligations have been satisfied in an amount that reflects the
consideration that we expect to receive in exchange for those performance obligations. Our revenue includes
revenue from the sale of manufactured products, including products that can be purchased out of a catalog
and custom manufactured products, and services, including custom antibody and assay development contracts,
antibody affinity extraction and stability and feasibility studies, as well as certain licensing and royalty
arrangements. The majority of our contracts include only one performance obligation, namely the delivery of
products, both custom and catalog, and services. We also recognize revenue from other contracts that may
include a combination of products and services, the provision of solely services, or from license fee
arrangements which may be associated with the delivery of product. Our application of the revenue
recognition accounting
guidance
with respect to the nature of future contractual arrangements could impact the forecasting of our revenue
for future periods, as both the mix of products and services we will sell in a given period, as well as the
size of contracts, is difficult to predict.
Furthermore,
the presentation of our financial results requires us to make estimates and assumptions that may affect
revenue recognition. In some instances, we could reasonably use different estimates and assumptions, and
changes in estimates may occur from period to period. See Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting
Estimates—Revenue Recognition.”
Given
the foregoing factors, comparing our revenue and operating results on a period-to-period basis may not be
meaningful, and our past results may not be indicative of our future performance.
Fluctuations
in our effective tax rate may adversely affect our results of operations and cash flows.
We
are subject to a variety of tax liabilities, including federal, state, foreign and other taxes such as
income, sales/use, payroll, withholding, and ad
valorem
taxes. Changes in tax laws or their interpretations could decrease our net income, the value of any tax loss
carryforwards, the value of tax credits recorded on our balance sheet and our cash flows, and accordingly
could have a material adverse effect on our business, financial condition, results of operations, cash flows
and prospects. In addition, our tax liabilities are subject to periodic audits by the relevant taxing
authority, which could increase our tax liabilities.
Our
business is subject to a number of environmental risks.
Our
manufacturing business involves the controlled use of hazardous materials and chemicals and is therefore
subject to numerous environmental and safety laws and regulations and to periodic inspections for possible
violations of these laws and regulations. The costs of compliance with environmental and safety laws and
regulations are significant. Any violations, even if inadvertent or accidental, of current or future
environmental and safety laws or regulations and the cost of compliance with any resulting order or fine
could adversely affect our operations.
Risks
Related to Our Reliance on Third Parties
We
depend on a limited number of customers for a high percentage of our revenue. If we cannot maintain our
current relationships with customers, fail to sustain recurring sources of revenue with our existing
customers, or if we fail to enter into new relationships, our future operating results will be adversely
affected.
Revenue
from our largest customers were 63.7%, 68.1% and 34.3% of total revenue for the years ended
December 31, 2022, 2021 and 2020, respectively. The revenue attributable to our top customers has
fluctuated in the past and may fluctuate in the future, which could have a material adverse effect on our
business, financial condition, results of operations, cash flows and prospects. In addition, the termination
of these relationships, including following any failure to renew a long-term contract, could result in a
temporary or permanent loss of revenue. See also “—The
extent and duration of our revenue associated with COVID-19 related products and services are uncertain and
are dependent, in important respects, on factors outside our control.”
Our
future success depends on our ability to maintain these relationships, to increase our penetration among
these existing customers and to establish new relationships. We engage in conversations with other companies
and institutions regarding potential commercial opportunities on an ongoing basis, which can be time
consuming. There is no assurance that any of these conversations will result in a commercial agreement, or
if an agreement is reached, that the resulting relationship will be successful. Speculation in the industry
about our existing or potential commercial relationships can be a catalyst for adverse speculation about us,
our products, our services and our technology, which can adversely affect our reputation and our business.
In addition, if our customers order our products or services, but fail to pay on time or at all, our
liquidity, financial condition, results of operations, cash flows and prospects could be materially and
adversely affected.
We
cannot assure investors that we will be able to further penetrate our existing markets or that our products
or services will gain adequate market acceptance. Any failure to increase penetration in our existing
markets would adversely affect our ability to improve our operating results.
We
may enter into additional distribution arrangements and marketing alliances for certain products and
services and any failure to successfully identify and implement these arrangements on favorable terms, if at
all, may impair our ability to effectively distribute and market our products.
We
may pursue additional arrangements regarding the sales and marketing and distribution of one or more of our
products and services and our future revenue may depend, in part, on our ability to enter into and maintain
arrangements with other companies having sales, marketing and distribution capabilities and the ability of
such companies to successfully market and
sell
any such products and services. Any failure to enter into such arrangements and marketing alliances on
favorable terms, if at all, could delay or impair our ability to distribute or market our products and
services and could increase our costs of distribution and marketing. Any use of distribution arrangements
and marketing alliances to commercialize our products and services will subject us to a number of risks,
including the following:
•we
may be required to relinquish important rights to our products;
•we
may not be able to control the amount and timing of resources that our distributors or collaborators may
devote to the distribution or marketing of our products;
•our
distributors or collaborators may experience financial difficulties; and
•business
combinations or significant changes in a collaborator’s business strategy may adversely affect a
collaborator’s willingness or ability to complete its obligations under any arrangement.
We
rely on a limited number of suppliers or, in some cases, sole suppliers, for some of our raw materials and
may not be able to find replacements or immediately transition to alternative suppliers.
Certain
of our raw materials are sourced from a limited number of suppliers and some materials, including a
proprietary DNA reagent, certain packaging materials, specific cell lines for Cygnus Technologies’
operations and certain raw materials used in our nucleic acid production products, as well as those raw
materials sold under the Glen Research brand, are sole sourced. Delays or difficulties in securing these raw
materials or other laboratory materials could result in an interruption in our production operations if we
cannot obtain an acceptable substitute. Since the onset of the COVID-19 pandemic, global supply chains have
faced challenges, including material availability, global logistics delays and constraints arising from,
among other things, the transportation capacity of ocean shipping containers, and these challenges have been
exacerbated by the ongoing macroeconomic conditions as discussed above. Any interruption of our supply chain
could significantly affect our business, financial condition, results of operations, cash flows and
prospects. While we may identify other suppliers, raw materials furnished by such replacement suppliers may
require us to alter our production operations or perform extensive validations, which may be time consuming
and expensive. There can be no assurance that we will be able to secure alternative materials and revalidate
them without experiencing interruptions in our workflow. If we should encounter delays or difficulties in
obtaining raw materials, our business, financial condition, results of operations, cash flows and prospects
could be adversely affected.
We
depend on a stable and adequate supply of quality raw materials from our suppliers, and price increases or
interruptions of such supply could have an adverse impact on our business, financial condition, results of
operations, cash flows and prospects.
Our
operations depend upon our ability to obtain raw materials at reasonable prices. Cost and wage inflation,
ongoing supply disruptions and logistics capacity constraints have increased, or may increase, our costs to
manufacture and distribute our products and services. If we are unable to obtain the materials we need at a
reasonable price due to inflationary pressures or other factors, we may not be able to produce certain of
our products at marketable prices or at all, which could have a material adverse effect on our results of
operations.
Although
we believe that we have stable relationships with our existing suppliers, we cannot assure you that we will
be able to secure a stable supply of raw materials going forward. Our suppliers may not be able to keep up
with our pace of growth or may reduce or cease their supply of raw materials to us at any time. In addition,
we cannot assure you that our suppliers have obtained and will be able to obtain or maintain all licenses,
permits and approvals necessary for their operations or comply with all applicable laws and regulations, and
failure to do so by them may lead to interruption in their business operations, which in turn may result in
shortages of raw materials supplied to us. Some of our suppliers are based overseas and therefore may need
to maintain export or import licenses. If the supply of raw materials is interrupted, due to ongoing supply
chain disruptions or other factors, our business, financial condition, results of operations, cash flows and
prospects may be adversely affected.
Because
we rely heavily on third-party package-delivery services, a significant disruption in these services,
damages or losses sustained during shipping or significant increases in prices could adversely affect our
business, financial condition, results of operations, cash flows and prospects.
We
ship a significant portion of our products to our customers through independent package delivery companies,
such as World Courier, FedEx, UPS and DHL. If one or more of these third-party package-delivery providers
were to experience a major work stoppage, preventing our products from being delivered in a timely fashion
or causing us to incur additional shipping costs we could not pass on to our customers, our costs could
increase and our relationships with certain of our customers could be adversely affected. In addition, if
one or more of these third-party package-delivery providers were to increase prices, and we were not able to
find comparable alternatives or make adjustments in our delivery network, our profitability could be
adversely affected. Furthermore, if one or more of these third-party package-delivery providers were to
experience performance problems
or
other difficulties, it could negatively impact our operating results and our customers’ experience. In
the past, some of our products have sustained serious damage in transit such that they were no longer
usable. Although we have taken steps to improve our packaging and shipping containers, there is no guarantee
our products will not become damaged or lost in transit in the future. If our products are damaged or lost
in transit, it may result in a substantial delay in the fulfillment of our customer’s order and,
depending on the type and extent of the damage, it may result in a substantial financial loss. If our
products are not delivered in a timely fashion or are damaged or lost during the delivery process, our
customers could become dissatisfied and cease using our products or our services, which would adversely
affect our business, financial condition, results of operations, cash flows and prospects.
Risks
Related to Laws and Regulations
Our
products could become subject to more onerous regulation by the FDA or other regulatory agencies in the
future, which could increase our costs and delay or prevent commercialization of our products, thereby
materially and adversely affecting our business, financial condition, results of operations, cash flows and
prospects.
We
make certain of our products available to customers as research-use-only (“RUO”) products. RUO
products are regulated by the FDA as medical devices, and include in
vitro
diagnostic products in the laboratory research phase of development that are being shipped or delivered for
an investigation that is not subject to the FDA’s investigational device exemption requirements.
Although medical devices are subject to stringent FDA oversight, products that are intended for RUO and are
labeled as RUO are exempt from compliance with most FDA requirements, including premarket clearance or
approval, manufacturing requirements, and others. A product labeled RUO but which is actually intended for
clinical diagnostic use may be viewed by the FDA as adulterated and misbranded under the FDCA, and subject
to FDA enforcement action. The FDA has indicated that when determining the intended use of a product labeled
RUO, the FDA will consider the totality of the circumstances surrounding distribution and use of the
product, including how the product is marketed and to whom. The FDA could disagree with our assessment that
our products are properly marketed as RUO, or could conclude that products labeled as RUO are actually
intended for clinical diagnostic use, and could take enforcement action against us, including requiring us
to stop distribution of our products until we are in compliance with applicable regulations, which would
reduce our revenue, increase our costs and adversely affect our business, prospects, results of operations
and financial condition. In the event that the FDA requires us to obtain marketing authorization of our RUO
products in the future, there can be no assurance that the FDA will grant any clearance or approval
requested by us in a timely manner, or at all.
Our
raw material products are manufactured following the voluntary quality standards of ISO 9001:2015. Our
GMP-grade raw material products follow ISO 9001:2015 standards, additional voluntary GMP quality standards
and customer specific requirements. We believe these raw material products, including our GMP-grade raw
material products, are exempt from compliance with the FDCA and the cGMP regulations of the FDA, as our
products are further processed by our customers and we do not make claims related to their safety or
effectiveness. We provide API products to customers for use in preclinical studies through and including
clinical trials. Our API products are manufactured following the principles detailed in the International
Council for Harmonisation (ICH) Q7, Good Manufacturing Practice Guide for Active Pharmaceutical Ingredients
(Section 19, APIs For Use in Clinical Trials) in order to comply with the applicable requirements of the
FDCA, and the comparable GMP principles for Europe; European Community, Part II, Basic Requirements for
Active Substances Used as Starting Materials (Section 19, APIs For Use in Clinical Trials). Manufacture of
APIs for use in clinical trials is regulated under § 501(a)(2)(B) of the FDCA, but is not subject to
the current GMP regulations in 21 CFR § 211 by operation of 21 CFR § 210. Our API products are
provided to customers under customer contracts that outline quality standards and product specifications. As
products advance through the clinical phases, requirements become more stringent and we work with customers
to define and agree on requirements and risks associated with their product.
The
FDA could disagree with our assessment that our products are exempt from current GMP regulations. In
addition, the FDA could conclude that the raw material and API products we provide to our customers are
actually subject to the pharmaceutical or drug quality-related regulations for manufacturing, processing,
packing or holding of drugs or finished pharmaceuticals, and could take enforcement action against us,
including requiring us to stop distribution of our products until we are in compliance with applicable
regulations, which would reduce our revenue, increase our costs and adversely affect our business,
prospects, results of operations and financial condition. In the event that the FDA requires us to comply
with FDA regulations, for our raw material and API products in the future, including the FDA’s current
GMP regulations, there can be no assurance that the FDA will find our operations are in compliance in a
timely manner, or at all.
We
are subject to stringent privacy laws, information security laws, regulations, policies and contractual
obligations related to data privacy and security and changes in such laws, regulations, policies and
contractual obligations could adversely affect our business, financial condition, results of operations,
cash flows and prospects.
We
are subject to data privacy and protection laws and regulations that apply to the collection, transmission,
storage and use of proprietary information and personally identifiable information (“PII”),
which among other things, imposes certain requirements relating to the privacy, security and transmission of
certain individually identifiable information.
Numerous
other federal and state laws, including state security breach notification laws, state health information
privacy laws and federal and state consumer protection laws, govern the collection, use, disclosure and
security of personal information. These laws continue to change and evolve and are increasing in breadth and
impact. Failure to comply with any of these laws and regulations could result in enforcement action against
us, including fines, imprisonment of company officials and public censure, claims for damages by affected
individuals, damage to our reputation and loss of goodwill, any of which could have a material adverse
effect on our business, financial condition, results of operations, cash flows and prospects. Additionally,
if we are unable to properly protect the privacy and security of personal information, we could be found to
have breached our contracts.
Many
states in which we operate have laws that protect the privacy and security of personal information. For
example, the California Consumer Privacy Act of 2018 (“CCPA”), which increases privacy rights
for California residents and imposes obligations on companies that process their personal information, came
into effect on January 1, 2020. Among other things, the CCPA requires covered companies to provide new
disclosures to California consumers and provide such consumers new data protection and privacy rights,
including the ability to opt-out of certain sales of personal information. The CCPA provides for civil
penalties for violations, as well as a private right of action for certain data breaches that result in the
loss of personal information. Further, the California Privacy Rights Act (the “CPRA”), which
took effect on January 1, 2023 (with certain provisions having retroactive effect to January 1, 2022),
amended the CCPA. Amongst other things, the CPRA and eliminated the “employee exemption” under
the CCPA, makes a distinction between “personal information” and “sensitive personal
information,” imposing heightened protections for “sensitive personal information,” and
brings business-to-business transactions under its purview. These laws and others like it are yet to be
tested and may subject us to increased regulatory scrutiny, litigation, and overall risk. Further, there is
discussion in Congress of a new federal data protection and privacy law to which we would become subject, if
it is enacted.
Various
foreign countries in which we operate also have, or are developing, laws that govern the collection, use,
disclosure, security and cross-border transmission of personal information. For example, in the European
Union (the “EU”) and the United Kingdom, the collection and use of personal data is governed by
the provisions of the General Data Protection Regulation (“GDPR”), in addition to other
applicable laws and regulations. The GDPR came into effect in May 2018,and has resulted in, and will
continue to result in, significantly greater compliance burdens and costs for companies like us. Any data
security breach could require notifications to the data subject and/or owners under U.S. federal, U.S.
state, and/or international data breach notification laws and regulations. Other jurisdictions outside the
EU are similarly introducing or enhancing privacy and data security laws, rules and regulations, which could
increase our compliance costs and the risks associated with noncompliance. We cannot guarantee that we are,
or will be, in compliance with all applicable international regulations as they are enforced now or as they
evolve.
It
is possible that these laws may be interpreted and applied in a manner that is inconsistent with our
practices and our efforts to comply with the evolving data protection rules may be unsuccessful. We must
devote significant resources to understanding and complying with this changing landscape. Failure to comply
with federal, state and international laws regarding privacy and security of personal information could
expose us to penalties under such laws, orders requiring that we change our practices, claims for damages or
other liabilities, regulatory investigations and enforcement action, litigation and significant costs for
remediation, any of which could adversely affect our business. Even if we are not determined to have
violated these laws, government investigations into these issues typically require the expenditure of
significant resources and generate negative publicity, which have a material adverse effect on our business,
financial condition, results of operations, cash flows and prospects.
We
are subject to export and import control laws and regulations that could impair our ability to compete in
international markets or subject us to liability if we violate such laws and regulations.
We
are subject to U.S. export controls and sanctions regulations that restrict the shipment or provision of
certain products and services to certain countries, governments and persons. While we take precautions to
prevent our products and services from being exported in violation of these laws, we cannot guarantee that
the precautions we take will prevent violations of export control and sanctions laws. If we are found to be
in violation of U.S. sanctions or export control laws, it could result in substantial fines and penalties
for us and for the individuals working for us. We may also be adversely affected through other penalties,
reputational harm, loss of access to certain markets, or otherwise. Complying with export control and
sanctions
regulations
may be time consuming and may result in the delay or loss of sales opportunities or impose other costs. Any
change in export or import regulations, economic sanctions or related legislation, or change in the
countries, governments, persons or technologies targeted by such regulations, could result in our decreased
ability to export or sell certain products and services to existing or potential customers in affected
jurisdictions.
Changes
in political, economic or governmental regulations may reduce demand for our products and services or
increase our expenses.
We
compete in many markets in which we and our customers must comply with federal, state, local and
international regulations, such as environmental, health and safety and food and drug regulations. We
develop, configure and market our products and services to meet customer needs created by those regulations.
The U.S. and international healthcare industry is subject to changing political, economic and regulatory
influences that could significantly affect the drug development process, research and development costs and
the pricing and reimbursement for pharmaceutical products, and also may increase the likelihood of
legislative or regulatory changes that could impact us or our business operations. Any significant change in
regulations could have an adverse effect on both our customers’ business and our business, which could
result in reduced demand for our products and services or increases in our expenses. For example, we provide
products and services used for basic research, raw materials used by biopharmaceutical customers for further
processing, and active pharmaceutical ingredients used for preclinical studies and clinical trials.
Changes
in the FDA’s regulation of the drug discovery and development process may have a negative impact on
the ability of our customers to conduct and fund clinical trials, which could have a material adverse effect
on the demand for the products and services we provide these customers. Additionally, the U.S. government
and governments worldwide have increased efforts to expand healthcare coverage while at the same time
curtailing and better controlling the increasing costs of healthcare. If cost-containment efforts limit our
customers’ profitability, they may decrease research and development spending, which could decrease
the demand for our products and services and materially adversely affect our growth prospects. Any of these
factors could harm our customers’ businesses, which, in turn, could materially adversely hurt our
business, financial condition, results of operations, cash flows and prospects.
We
are subject to financial, operating, legal and compliance risk associated with global operations.
We
engage in business globally, with approximately 62%, 60% and 47% of our revenue for the years ended
December 31, 2022, 2021 and 2020, respectively, coming from outside the U.S. In addition, one of our
strategies is to expand geographically, both through distribution and through direct sales. This subjects us
to a number of risks, including international economic, political, and labor conditions; currency
fluctuations; tax laws (including U.S. taxes on income earned by foreign subsidiaries); increased financial
accounting and reporting burdens and complexities; unexpected changes in, or impositions of, legislative or
regulatory requirements; failure of laws to protect intellectual property rights adequately; inadequate
local infrastructure and difficulties in managing and staffing international operations; delays resulting
from difficulty in obtaining export licenses for certain technology; tariffs, quotas and other trade
barriers and restrictions; transportation delays; operating in locations with a higher incidence of
corruption and fraudulent business practices; and other factors beyond our control, including terrorism,
war, natural disasters, climate change and diseases.
The
application of laws and regulations implicating global transactions is often unclear and may at times
conflict. Compliance with these laws and regulations may involve significant costs or require changes in our
business practices that result in reduced revenue and profitability. Non-compliance could also result in
fines, damages, criminal sanctions, prohibited business conduct, and damage to our reputation. We incur
additional legal compliance costs associated with our global operations and could become subject to legal
penalties in foreign countries if we do not comply with local laws and regulations, which may be
substantially different from those in the U.S.
We
may expand our operations in countries with developing economies, where it may be common to engage in
business practices that are prohibited by anti-corruption and anti-bribery laws and regulations that apply
to us, such as the U.S. Foreign Corrupt Practices Act (“FCPA”), the U.S. Travel Act, and the UK
Bribery Act 2010, which prohibit improper payments or offers of payment to foreign governments and political
parties by us for the purpose of obtaining or retaining business. Although we implement policies and
procedures designed to ensure compliance with these laws, there can be no assurance that all of our
employees, contractors, distributors and agents, including those based in foreign countries where practices
which violate such U.S. laws may be customary, will comply with our internal policies. Any such
non-compliance, even if prohibited by our internal policies, could have an adverse effect on our business
and result in significant fines or penalties.
Our
activities are and will continue to be subject to extensive government regulation, which is expensive and
time consuming.
We
are subject to various local, state, federal, foreign and transnational laws and regulations, and, in the
future, any changes to such laws and regulations could adversely affect us.
We
provide products and services used for basic research, raw materials and life science reagents used by
biopharmaceutical customers for further processing, assays for biologics safety testing and active
pharmaceutical ingredients used for preclinical studies and clinical trials. The quality of our products and
services is critical to researchers looking to develop novel vaccines and therapies and for
biopharmaceutical customers who use our products as raw materials or who are engaged in preclinical studies
and clinical trials. Biopharmaceutical customers are subject to extensive regulations by the FDA and similar
regulatory authorities in other countries for conducting clinical trials and commercializing products for
therapeutic or diagnostic use. This regulatory scrutiny results in our customers imposing rigorous quality
requirements on us as their supplier through supplier qualification processes and customer contracts.
Additionally,
regulatory authorities and our customers may conduct scheduled or unscheduled periodic inspections of our
facilities to monitor our regulatory compliance or compliance with our quality agreements with our
customers. There are significant risks at each stage of the regulatory scheme for our customers.
Regulatory
agencies may in the future take action against us or our customers for failure to comply with applicable
regulations governing clinical trials and the development and testing of therapeutic products. Failure by us
or by our customers to comply with the requirements of these regulatory authorities, including without
limitation, remediating any inspectional observations to the satisfaction of these regulatory authorities,
could result in warning letters, product recalls or seizures, monetary sanctions, injunctions to halt
manufacture and distribution, restrictions on our operations, civil or criminal sanctions, or withdrawal of
existing or denial of pending approvals, including those relating to products or facilities. In addition,
such a failure could expose us to contractual or product liability claims, contractual claims from our
customers, including claims for reimbursement for lost or damaged active pharmaceutical ingredients, as well
as ongoing remediation and increased compliance costs, any or all of which could be significant.
We
are also subject to a variety of federal, state, local and international laws and regulations that govern,
among other things, the importation and exportation of products, the handling, transportation and
manufacture of substances that could be classified as hazardous, and our business practices in the U.S. and
abroad such as anti-corruption and anti-competition laws. Any noncompliance by us with applicable laws and
regulations or the failure to maintain, renew or obtain necessary permits and licenses could result in
criminal, civil and administrative penalties and could have an adverse effect on our results of
operations.
Increasing
scrutiny and changing expectations from investors, lenders, customers, government regulators and other
market participants with respect to our Environmental, Social and Governance (“ESG”) policies
and activities may impose additional costs on us or expose us to additional risks.
Companies
across all industries and around the globe are facing increasing scrutiny relating to their ESG policies,
initiatives and activities by investors, lenders, customers, government regulators and other market
participants. In particular, these constituencies are increasingly focusing on environmental stewardship,
including climate change, water use, deforestation, waste, and other sustainability concerns, as well as
diversity and inclusion, workplace conduct, support for local communities, and other human capital and
social issues.
There
is no guarantee that any ESG or sustainability goals set forth in our ESG initiatives will be achieved on
the desired timeframe or at all, and the achievement of any such goals may require the incurrence of
additional costs or the implementation of operational changes, any of which could adversely affect the
Company’s results of operations.
Additionally,
changes in legal and regulatory requirements related to ESG have been issued in the E.U., its Member States
and other countries, particularly with respect to climate change, emission reduction and environmental
stewardship in the U.S., amongst other regulatory efforts, the SEC has proposed rules to enhance and
standardize climate-related disclosures in public company filings. We expect legal, regulatory and reporting
requirements related to ESG matters to continue to expand globally and increase our costs of
compliance.
If
we are unable to meet our ESG initiatives or evolving investor, industry, or customer expectations and
standards, or we are perceived to have not responded adequately on any number of ESG matters, we risk damage
to our brand and reputation, adverse impacts to our ability to secure government contracts, decreased
desirability of our common stock to investors, or limited access to capital markets and other sources of
financing.
Risks
Related to Our Intellectual Property and Technology
If
we are unable to obtain, maintain and enforce intellectual property protection for our current or future
products, or if the scope of our intellectual property protection is not sufficiently broad, our ability to
commercialize our products successfully and to compete effectively may be materially adversely
affected.
Our
success depends on our ability to obtain and maintain patent and other intellectual property protection in
the United States and other countries with respect to our current and future proprietary products. We rely
upon a combination of patents and trade secret protection to protect the intellectual property related to
our technology, manufacturing processes, and products. Our commercial success depends in part on obtaining
and maintaining patent and trade secret protection of our current and future products, if any, and the
methods used to manufacture them, as well as successfully defending such patents and trade secrets against
third-party challenges. Our ability to stop third parties from making, using, selling, offering to sell or
importing our products is dependent upon the extent to which we have rights under valid and enforceable
patents and other intellectual property that covers these activities.
The
patent prosecution process is expensive and time consuming, and we may not be able to file and prosecute all
necessary or desirable patent applications at a reasonable cost or in a timely manner or in all
jurisdictions where protection may be commercially advantageous. It is also possible that we may fail to
identify patentable aspects of our research and development output before it is too late to obtain patent
protection. In addition, we or our collaborators may only pursue, obtain or maintain patent protection in a
limited number of countries. There is no assurance that all potentially relevant prior art relating to our
patents and patent applications has been found. We may be unaware of prior art that could be used to
invalidate or narrow the scope of an issued patent or prevent our pending patent applications from issuing
as patents. Because patent applications in the United States, Europe and many other non-U.S. jurisdictions
are typically not published until 18 months after filing, or in some cases not at all, because publications
of discoveries in scientific literature lag behind actual discoveries, and because we cannot be certain that
we or our licensors were the first to make the inventions claimed in any of our owned or any in-licensed
issued patents or pending patent applications, or that we or our licensors were the first to file for
protection of the inventions set forth in our patents or patent applications. As a result, we may not be
able to obtain or maintain protection for certain inventions. Even if patents do successfully issue, such
patents may not adequately protect our intellectual property, provide exclusivity for our current or future
products, prevent others from designing around our claims or otherwise provide us with a competitive
advantage. We cannot offer any assurances about which, if any, patents will issue, the breadth of any such
patents or whether any issued patents will be found invalid or unenforceable or will be threatened by third
parties. In addition, third parties may challenge the validity, enforceability, ownership, inventorship or
scope of any of our patents. Any successful challenge to any of our patents could deprive us of rights
necessary for the successful commercialization of our current or future products and could impair or
eliminate our ability to collect future revenue and royalties with respect to such products. If any of our
patent applications with respect to our current or future products fail to result in issued patents, if
their breadth or strength of protection is narrowed or threatened, or if they fail to provide meaningful
exclusivity or competitive position, it could dissuade companies from collaborating with us or otherwise
adversely affect our competitive position.
The
patent positions of life science companies can be highly uncertain and involve complex legal and factual
questions for which important legal principles remain unresolved. No consistent policy regarding the breadth
of claims allowed in life science patents has emerged to date in the United States. The standards applied by
the United States Patent and Trademark Office (the “USPTO”) and foreign patent offices in
granting patents are not always applied uniformly or predictably and can change. Additionally, the laws of
some foreign countries do not protect intellectual property rights to the same extent as the laws of the
United States, and many companies have encountered significant problems in protecting and defending such
rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing
countries, do not favor the enforcement of patents and other intellectual property rights, particularly
those relating to biotechnology, which could make it difficult for us to stop the infringement,
misappropriation, or other violation of our patents or other intellectual property, including the
unauthorized reproduction of our manufacturing or other know-how or the marketing of competing products in
violation of our intellectual property rights generally. Any of these outcomes could impair our ability to
prevent competition from third parties, which may have a material adverse effect on our business, financial
condition, results of operations, cash flows and prospects.
Further,
the existence of issued patents does not guarantee our right to practice the patented technology or
commercialize products covered by such a patent. Third parties may have or obtain rights to patents which
they may use to prevent or attempt to prevent us from practicing our patented technology or commercializing
our patented products. If any of these other parties are successful in obtaining valid and enforceable
patents, and establishing our infringement of those patents, we could be prevented from selling our products
unless we were able to obtain a license under such third-party patents, which may not be available on
commercially reasonable terms or at all. In addition, third parties may seek approval to market their own
products similar to or otherwise competitive with our products. In these circumstances, we may need to
defend or assert our patents, including by filing lawsuits alleging patent infringement. In any of these
types of proceedings, a court or agency of competent jurisdiction may find our patents invalid or
unenforceable. Our competitors and other third parties may also be able to
circumvent
our patents by developing similar or alternative products in a non-infringing manner. Any of the foregoing
could have a material adverse effect on our business, financial condition, results of operations, cash flows
and prospects.
In
addition, competitors may use our technologies in jurisdictions where we have not obtained or are unable to
adequately enforce patent protection to develop their own products and further, may export otherwise
infringing products to territories where we have patent protection, but enforcement is not as strong as that
in the United States and Europe. These products may compete with our products, and our patents or other
intellectual property rights may not be effective or sufficient to prevent them from competing with us.
Proceedings to enforce our patent rights, whether or not successful, could result in substantial costs and
divert our efforts and attention from other aspects of our business, could put our patents at risk of being
invalidated or held unenforceable, or interpreted narrowly and our patent applications at risk of not
issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits
that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful.
Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to
obtain a significant commercial advantage from the intellectual property that we develop, acquire or
license.
Intellectual
property that we own or in-license may be subject to a reservation of rights by one or more third parties.
For example, one of our patents is co-owned with third parties and some of our patent rights in the future
may be co-owned with third parties. If we are unable to obtain an exclusive license to any such third-party
co-owners’ interest in such patent rights, such co-owners may be able to license their rights to other
third parties, including our competitors, and our competitors could market competing products and
technology. In addition, we may need the cooperation of any such co-owners of such patent rights in order to
enforce such patent rights against third parties, and such cooperation may not be provided to us. Any of the
foregoing could have a material adverse effect on our competitive position, business, financial conditions,
results of operations, and prospects.
Moreover,
the research resulting in certain of our patents and technology was funded in part by the U.S. government.
As a result, the U.S. government has certain rights to such patent rights and technology, which include
march-in rights. When new technologies are developed with government funding, in order to secure ownership
of such patent rights, the recipient of such funding is required to comply with certain government
regulations, including timely disclosing the inventions claimed in such patent rights to the U.S. government
and timely electing title to such inventions. Additionally, the U.S. government generally obtains certain
rights in any resulting patents, including a nonexclusive license authorizing the government to use the
invention or to have others use the invention on its behalf. Accordingly, we or our licensors have granted
the U.S. government a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have
practiced for or on behalf of the United States, the inventions described in the patents and patent
applications relating to such inventions. If the U.S. government decides to exercise these rights, it is not
required to engage us as its contractor in connection with doing so. The government’s rights may also
permit it to disclose our confidential information to third parties and to exercise march-in rights to use
or allow third parties to use such government-funded technology. The government can exercise its march-in
rights if it determines that action is necessary because we fail to achieve practical application of the
government-funded technology, or because action is necessary to alleviate health or safety needs, to meet
requirements of federal regulations, or to give preference to U.S. industry. In addition, our rights in such
inventions may be subject to certain requirements to manufacture products embodying such inventions in the
United States. If we fail to comply with those requirements, we could lose our ownership of or other rights
to any patents subject to such regulations. Any exercise by the government of any of the foregoing rights or
by any third party of its reserved rights could have a material adverse effect on our competitive position,
business, financial condition, results of operations, and prospects.
Furthermore,
patents have a limited lifespan. In the United States, the unextended expiration of a patent is 20 years
after its non-provisional filing date. Various extensions may be available, however, the life of a patent
and the protection it affords is limited. Given the amount of time required for the development, testing,
regulatory review and approval of new products, our patents protecting such candidates might expire before
or shortly after such candidates are commercialized. If we encounter delays in obtaining regulatory
approvals, the period of time during which we could market a product under patent protection could be
further reduced. Even if patents covering our future products are obtained, once such patents expire, we may
be vulnerable to competition from similar products. The launch of a similar version of one of our products
would likely result in an immediate and substantial reduction in the demand for our product. As a result,
our patent portfolio may not provide us with sufficient rights to exclude others from commercializing
products similar or identical to ours. Any of the foregoing could have a material adverse effect on our
business, financial condition, results of operations, cash flows and prospects.
If
we are prevented from enforcing our intellectual property rights because of governmental regulatory policies
or political pressure or action, our sales and profitability may be materially adversely affected.
Our
ability to maintain and grow our product sales and profitability depends, in part, on our ability to
maintain and enforce our patents and other intellectual property rights. Proposed actions to waive
intellectual property protections for COVID-19 vaccines and associated technology, such as those under
discussion at the World Trade Organization, which are supported by the U.S. government, may impact our
ability to fully assert our intellectual property rights related to our CleanCap product in
connection
with the production of COVID-19 vaccines. Further, these policy actions may complicate our analysis and
decision-making with respect to both research and development and capital investment, given the potential
for lower returns on those investments that could result from our inability to fully protect our
intellectual property. If we are unable to successfully navigate these considerations, the future revenues
and profitability of our business could be negatively impacted. We are unable to estimate the impact of
these potential policies given that they remain undefined and their adoption is uncertain.
Our
internal computer systems, or those of our customers, collaborators or other contractors, have been and may
in the future be subject to cyber-attacks or security breaches, which could result in a material disruption
of our product development programs or otherwise adversely affect our business, financial condition, results
of operations, cash flows and prospects.
Despite
the implementation of security measures, our internal computer systems and those of our customers are
vulnerable to damage from computer viruses and unauthorized access. Cyber-attacks are increasing in their
frequency, sophistication and intensity, and have become increasingly difficult to detect. Cyber-attacks
could include the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering
and other means to affect service reliability and threaten the confidentiality, integrity and availability
of information. Cyber-attacks also could include phishing attempts or e-mail fraud to cause unauthorized
payments or information to be transmitted to an unintended recipient. A material cyber-attack or security
breach could cause interruptions in our operations and could result in a material disruption of our business
operations, damage to our reputation, financial condition, results of operations, cash flows and
prospects.
In
the ordinary course of our business, we collect and store sensitive data, including, among other things,
personally identifiable information about our employees, intellectual property, and proprietary business
information. Any cyber-attack or security breach that leads to unauthorized access, use or disclosure of
personal or proprietary information could harm our reputation, cause us not to comply with federal and/or
state breach notification laws and foreign law equivalents and otherwise subject us to liability under laws
and regulations that protect the privacy and security of personal information. In addition, we could be
subject to risks caused by misappropriation, misuse, leakage, falsification or intentional or accidental
release or loss of information maintained in the information systems and networks of our company and our
vendors, including personal information of our employees, and company and vendor confidential data. In
addition, outside parties have previously attempted and may in the future attempt to penetrate our systems
or those of our vendors or fraudulently induce our personnel or the personnel of our vendors to disclose
sensitive information in order to gain access to our data and/or systems or make unauthorized payments to
third parties. Like other companies, we have on occasion experienced, and will continue to experience, data
security incidents involving access to company data, unauthorized payments and threats to our data and
systems, including malicious codes and viruses, phishing, business email compromise attacks, or other
cyber-attacks. The number and complexity of these threats continue to increase over time. If a material
breach of our information technology systems or those of our vendors occurs, the market perception of the
effectiveness of our security measures could be harmed and our reputation and credibility could be
damaged.
We
could be required to expend significant amounts of money and other resources to respond to these threats or
breaches and to repair or replace information systems or networks and could suffer financial loss or the
loss of valuable confidential information. In addition, we could be subject to regulatory actions and/or
claims made by individuals and groups in private litigation involving privacy issues related to data
collection and use practices and other data privacy laws and regulations, including claims for misuse or
inappropriate disclosure of data, as well as unfair or deceptive practices. Although we develop and maintain
systems and controls designed to prevent these events from occurring, and we have a process to identify and
mitigate threats, the development and maintenance of these systems, controls and processes is costly and
requires ongoing monitoring and updating as technologies change and efforts to overcome security measures
become increasingly sophisticated. Moreover, despite our efforts, the possibility of these events occurring
cannot be eliminated entirely and there can be no assurance that any measures we take will prevent
cyber-attacks or security breaches that could adversely affect our business, financial condition, results of
operations, cash flows and prospects.
If
we are unable to protect the confidentiality of our proprietary information, the value of our technology and
products could be materially adversely affected.
We
also may rely on trade secrets to protect our technology, especially where we do not believe patent
protection is appropriate or obtainable. To maintain the confidentiality of trade secrets and other
proprietary information, we enter into confidentiality agreements with our employees, consultants,
contractors, collaborators, CDMOs, CROs and others upon the commencement of their relationships with us.
These agreements require that all confidential information developed by the individual or entity or made
known to the individual or entity by us during the course of the individual’s or entity’s
relationship with us be kept confidential and not disclosed to third parties. Our agreements with employees
as well as our personnel policies also generally provide that any inventions conceived by the individual in
the course of rendering services to us shall be our exclusive property or that we may obtain full rights to
such inventions at our election. However, trade secrets are difficult to protect. Although we
use
reasonable efforts to protect our trade secrets, our employees, consultants, contractors, collaborators,
CDMOs, CROs and others may unintentionally or willfully disclose our information to competitors. We also
face the risk that present or former employees could continue to hold rights to intellectual property used
by us, demand the registration of intellectual property rights in their name, and seek payment of damages
for our use of such intellectual property.
Enforcing
a claim that a third party illegally obtained or is using any of our trade secrets is expensive and time
consuming, and the outcome is unpredictable. We may not have adequate remedies in the event of unauthorized
use or disclosure of our trade secrets or other proprietary information in the case of a breach of any such
agreements and our trade secrets and other proprietary information could be disclosed to third parties,
including our competitors. Many of our partners also collaborate with our competitors and other third
parties. The disclosure of our trade secrets to our competitors, or more broadly, would impair our
competitive position and may materially harm our business, financial condition, results of operations, cash
flows and prospects. Costly and time-consuming litigation could be necessary to enforce and determine the
scope of our rights, and failure to maintain trade secret protection could adversely affect our competitive
business position. The enforceability of confidentiality agreements may vary from jurisdiction to
jurisdiction. Courts outside the United States are sometimes less willing to protect trade secrets.
Moreover, our competitors may independently develop substantially equivalent or superior knowledge, methods
and know-how, and the existence of our own trade secrets affords no protection against such independent
discovery.
We
may become involved in lawsuits to protect or enforce our patents, which could be expensive, time-consuming
and unsuccessful and could result in a court or administrative body finding our patents to be invalid or
unenforceable.
Even
if the patent applications we own or license are issued, third parties may challenge or infringe upon our
patents. To counter infringement, we may be required to file infringement claims, which can be expensive and
time-consuming. In patent litigation in the United States, defendant counterclaims alleging invalidity or
unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any
of several statutory requirements, including novelty, non-obviousness (or inventive step), written
description or enablement. In addition, patent validity challenges may, under certain circumstances, be
based upon non-statutory obviousness-type double patenting, which, if successful, could result in a finding
that the claims are invalid for obviousness-type double patenting or the loss of patent term if a terminal
disclaimer is filed to obviate a finding of obviousness-type double patenting. Grounds for an
unenforceability assertion could be an allegation that someone connected with prosecution of the patent
withheld information material to patentability from the USPTO, or made a misleading statement, during
prosecution.
Third
parties may raise similar claims before administrative bodies in the United States or abroad, even outside
the context of litigation. Such mechanisms include re-examination, post-grant review, inter
partes
review, interference proceedings, derivation proceedings, and equivalent proceedings in foreign
jurisdictions (e.g., opposition proceedings). Such proceedings could result in the revocation or
cancellation of or amendment to our patents in such a way that they no longer cover our current or future
products or provide any competitive advantage. The outcome following legal assertions of invalidity and
unenforceability is unpredictable. If a third party were to prevail on a legal assertion of invalidity or
unenforceability, we could lose part or all of the patent protection on one or more of our current or future
products, which could result in our competitors and other third parties using our technology to compete with
us. Such a loss of patent protection could have a material adverse impact on our business, financial
condition, results of operations, cash flows and prospects.
Interference
proceedings, or other similar enforcement and revocation proceedings, provoked by third parties or brought
by us may be necessary to determine the priority of inventions with respect to our patents or patent
applications. An unfavorable outcome could require us to cease using the related technology or to attempt to
license rights to it from the prevailing party. Our business could be harmed if the prevailing party does
not offer us a license on commercially reasonable terms. Our defense of litigation or interference
proceedings may fail and, even if successful, may result in substantial costs and distract our management
and other employees. We may not be able to prevent, alone or with our licensors, infringement,
misappropriation or other violation of our intellectual property rights, particularly in countries where the
laws may not protect those rights as fully as in the United States.
In
an infringement proceeding, even one initiated by us, there is a risk that a court will decide that our
patents are not valid and that we do not have the right to stop the other party from using the inventions
they describe. There is also the risk that, even if the validity of such patents is upheld, the court will
refuse to stop the other party on the ground that such other party’s activities do not infringe our
rights to these patents.
Some
of our competitors may be able to sustain the costs of complex patent litigation more effectively than we
can because they have substantially greater resources. In addition, any uncertainties resulting from the
initiation and continuation of any litigation could have a material adverse effect on our ability to raise
the funds necessary to continue our operations. In addition, patent holding companies that focus solely on
extracting royalties and settlements by enforcing patent rights may target us, especially as we gain greater
visibility and market exposure as a public company.
An
adverse outcome in a litigation or proceeding involving our patents could limit our ability to assert our
patents against competitors, affect our ability to receive royalties or other licensing consideration from
our licensees, and may curtail or preclude our ability to exclude third parties from making, using and
selling similar or competitive products. Any of these occurrences could have a material adverse effect on
our business, financial condition, results of operations, cash flows and prospects.
If
we are sued for infringing, misappropriating, or otherwise violating intellectual property rights of third
parties, such litigation could be costly and time consuming and could prevent or delay us from developing or
commercializing our current or future products.
Our
products may infringe on, or be accused of infringing on, one or more claims of an issued patent or may fall
within the scope of one or more claims in a published patent application that may be subsequently issued and
to which we do not hold a license or other rights.
Because
patent applications in the United States and many foreign jurisdictions are typically not published until 18
months after filing, or in some cases not at all, and publications in the scientific literature often lag
behind actual discoveries, we cannot be certain that others have not filed patent applications for
technology covered by our issued patents or our pending applications, or that we were the first to invent
the technology. Others, including our competitors, may have filed, and may in the future file, patent
applications covering technology similar to ours. Any such patent application may have priority over our
patent applications or patents, which could further require us to obtain rights to issued patents by others
covering such technologies. If another party has filed a U.S. patent application on inventions similar to
ours, we may have to participate in an interference proceeding declared by the USPTO to determine priority
of invention in the United States. The costs of these proceedings could be substantial, and it is possible
that such efforts would be unsuccessful if, unbeknownst to us, the other party had independently arrived at
the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position
with respect to such inventions.
Additionally,
pending patent applications that have been published can, subject to certain limitations, be later amended
in a manner that could cover our current or future products or the use of our current or future products.
After issuance, the scope of patent claims remains subject to construction based on interpretation of the
law, the written disclosure in a patent and the patent’s prosecution history. Our interpretation of
the relevance or the scope of a patent or a pending application may be incorrect. In addition, third parties
may obtain patents in the future and claim that use of our technologies infringes upon these patents. These
third parties could bring claims against us or our collaborators that would cause us to incur substantial
expenses and, if successful against us, could cause us to pay substantial damages.
The
life sciences industry has produced a proliferation of patents, and it is not always clear to industry
participants, including us, which patents cover various types of products or methods of use. The coverage of
patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are
sued for patent infringement, we would need to demonstrate that our products or methods of use either do not
infringe the patent claims of the relevant patent and/or that the patent claims are invalid or
unenforceable, and we may not be able to do this. Proving invalidity, in particular, is difficult since it
requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by
issued patents. Third parties have, and may in the future have, U.S. and non-U.S. issued patents and pending
patent applications that may cover our current or future products. Such a third party may claim that we or
our manufacturing or commercialization partners are using inventions covered by the third party’s
patent rights and may go to court or a tribunal to stop us from engaging in our normal operations and
activities, including making or selling our current or future products. In the event that any of these
patent rights were asserted against us, we believe that we have defenses against any such action, including
that such patents would not be infringed by our current or future products and/or that such patents are not
valid. However, if any such patent rights were to be asserted against us and our defenses to such assertion
were unsuccessful, unless we obtain a license to such patents, we could be liable for damages, which could
be significant and include treble damages and attorneys’ fees if we are found to willfully infringe
such patents, and we could be precluded from commercializing any future products that were ultimately held
to infringe such patents, any of which could have a material adverse effect on our business, financial
condition, results of operations, cash flows and prospects.
If
we are found to infringe the patent rights of a third party, or in order to avoid potential claims, we or
our collaborators may choose or be required to seek a license from a third party and be required to pay
license fees or royalties or both. These licenses may not be available on reasonable terms, or at all. In
particular, any of our competitors that control intellectual property that we are found to infringe may be
unwilling to provide us a license under any terms. Even if we or our collaborators were able to obtain a
license, the rights may be nonexclusive, which could result in our competitors gaining access to the same
intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to
cease some aspect of our business operations, if, as a result of actual or threatened patent infringement
claims, we or our collaborators are unable to enter into licenses on acceptable terms. In addition, we could
be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to
have willfully infringed a patent. Further, if a patent infringement suit is brought against us or
our
third-party service providers and if we are unable to successfully obtain rights to required third-party
intellectual property, we may be required to expend significant time and resources to redesign our current
or future products, or to develop or license replacement technology, all of which may not be feasible on a
technical or commercial basis, and may delay or require us to abandon our development, manufacturing or
sales activities relating to our current or future products. A finding of infringement could prevent us from
commercializing our future products or force us to cease some of our business operations, which could harm
our business. Claims that we have misappropriated the confidential information or trade secrets of third
parties could have a similar negative impact on our business. Any of the foregoing could have a material
adverse effect on our business, financial condition, results of operations, cash flows and prospects.
Intellectual
property litigation and other proceedings could cause us to spend substantial resources and distract our
personnel from their normal responsibilities.
Even
if resolved in our favor, intellectual property litigation or other legal proceedings relating to our, our
licensors’ or other third parties’ intellectual property claims may cause us to incur
significant expenses and could distract our personnel from their normal responsibilities. Patent litigation
and other proceedings may also absorb significant management time. If not resolved in our favor, litigation
may require us to pay any portion of our opponents’ legal fees. Such litigation or proceedings could
substantially increase our operating losses and reduce the resources available for development activities or
any future sales, marketing, or distribution activities. We may not have sufficient financial or other
resources to conduct such litigation or proceedings adequately. Our competitors or other third parties may
be able to sustain the cost of such litigation and proceedings more effectively than we can because of their
substantially greater resources. Uncertainties resulting from our participation in patent litigation or
other proceedings could have a material adverse effect on our ability to compete in the marketplace.
Furthermore, because of the substantial amount of discovery required in certain jurisdictions in connection
with intellectual property litigation, there is a risk that some of our confidential information could be
compromised by disclosure during this type of litigation. There could also be public announcements of the
results of hearings, motions or other interim proceedings or developments. If securities analysts or
investors perceive these results to be negative, the perceived value of our current or future products or
intellectual property could be diminished. Accordingly, the market price of our Class A common stock may
decline. Uncertainties resulting from the initiation and continuation of patent litigation or other
proceedings could have a material adverse effect on our business, financial condition, results of
operations, and prospects.
If
we fail to comply with our obligations under any license agreements, disagree over contract interpretation,
or otherwise experience disruptions to our business relationships with our licensors, we could lose
intellectual property rights that are necessary to our business.
We
rely, in part, on intellectual property and technology which we have in-licensed. We may also need to obtain
additional licenses in the future to advance our research or allow commercialization of our future products
and it is possible that we may be unable to do so at a reasonable cost or on reasonable terms, if at all.
Moreover, such licenses may not provide exclusive rights to use such intellectual property and technology in
all relevant fields of use and in all territories in which we may wish to develop or commercialize our
future products.
In
addition, our existing license agreements impose, and any future license agreements we enter into may
impose, various development, commercialization, funding, milestone, royalty, diligence, sublicensing,
insurance, patent prosecution and enforcement or other obligations on us. Our license agreements, and any
future license agreement we enter into, may also impose restrictions on our ability to license certain of
our intellectual property to third parties or to develop or commercialize certain current or future products
or technologies. In spite of our best efforts, our counterparties may conclude that we have breached our
obligations under our agreements, or that we have used the intellectual property licensed to us in an
unauthorized manner, in which case, we may be required to pay damages and the counterparty may have the
right to terminate the agreement. Any of the foregoing could result in us being unable to develop,
manufacture and sell products that are covered by the licensed intellectual property or technology, or
enable a competitor to gain access to the licensed intellectual property or technology.
We
might not have the necessary rights or the financial resources to develop, manufacture or market our current
or future products without the rights granted under our license agreements, and the loss of sales or
potential sales in current or future products covered by such license agreements could have a material
adverse effect on our business, financial condition, results of operations, cash flows and prospects.
Disputes
may arise regarding intellectual property subject to license agreements, including:
•the
scope of rights granted under the license agreement and other interpretation related issues;
•the
extent to which our technology and processes infringe on intellectual property of the licensor that is not
subject to the license agreement;
•the
sublicensing of patent and other rights under our collaborative development relationships;
•our
diligence obligations under the license agreement and what activities satisfy those diligence
obligations;
•our
financial obligations under the license agreement;
•the
inventorship and ownership of inventions and know-how resulting from the joint creation or use of
intellectual property by our licensors and us and our partners; and
•the
priority of invention of patented technology.
In
addition, the agreements under which we currently license intellectual property or technology to or from
third parties are complex, and certain provisions in such agreements may be susceptible to multiple
interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what
we believe to be the scope of our rights to the relevant intellectual property or technology, or increase
what we believe to be our financial or other obligations under the relevant agreement, either of which could
have a material adverse effect on our business, financial condition, results of operations, and prospects.
Moreover, if disputes over intellectual property that we have licensed prevent or impair our ability to
maintain our current licensing arrangements on commercially acceptable terms, we may be unable to
successfully develop and commercialize the affected future products.
In
some cases, we may not have primary control over prosecution, maintenance, enforcement and defense of
patents and patent applications that we have in-licensed from third parties, and instead we rely on our
licensors for these activities. We cannot be certain that such activities have been or will be conducted in
compliance with applicable laws and regulations or in a manner consistent with the best interests of our
business. If we do undertake any enforcement of our in-licensed patents or defense of any claims asserting
the invalidity of such patents, such actions may be subject to the cooperation of our licensors or other
third parties. If our licensors or other third parties fail to prosecute, maintain, enforce and defend
intellectual property licensed to us, or lose their own rights to such intellectual property, the rights we
have licensed may be impaired or eliminated and our ability to develop and commercialize any of our products
that are subject to such rights could be adversely affected.
In-licensing
or acquisition of third-party intellectual property is a competitive area and a number of more established
companies are also pursuing strategies to in-license or acquire third-party intellectual property rights
that we may consider attractive or necessary for our business. These companies may have a competitive
advantage over us due to their size, cash resources and greater capabilities with respect to clinical
development and commercialization. Furthermore, companies that perceive us as a competitor may be unwilling
to assign or license rights to us. If we are unable to successfully obtain rights to required third-party
intellectual property rights or maintain the existing intellectual property rights we have on reasonable
terms or at all, we may have to abandon development of the relevant program or current or future product and
our business, financial condition, results of operations, cash flows and prospects could suffer.
Changes
to the patent law in the United States and other jurisdictions could increase the uncertainties and costs
surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents,
thereby impairing our ability to protect our technologies and current or future products.
As
is the case with other life sciences companies, our success is heavily dependent on intellectual property,
particularly patents. Obtaining and enforcing patents in the life sciences industry involves both
technological and legal complexity and is therefore costly, time consuming and inherently uncertain. Changes
in either the patent laws or in interpretations of patent laws in the United States and other countries may
increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement
or defense of issued patents.
For
example, the Leahy-Smith America Invents Act (the “America Invents Act”), was signed into law on
September 16, 2011, and many of the substantive changes became effective on March 16, 2013. The America
Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of
our patent applications and the enforcement or defense of our issued patents, all of which could have a
material adverse effect on our business, financial condition, results of operations, and prospects.
Specifically, the America Invents Act reforms United States patent law in part by changing the U.S. patent
system from a “first to invent” system to a “first inventor to file” system. Under a
“first inventor to file” system, assuming the other requirements for patentability are met, the
first inventor to file a patent application generally will be entitled to the patent on an invention
regardless of whether another inventor was the first to invent the invention. This will require us to be
cognizant going forward of the time from invention to filing of a patent application and be diligent in
filing patent applications. Circumstances may arise that could prevent us from promptly filing patent
applications on our inventions and allow third parties to file patents claiming our inventions before we are
able to do so. The America Invents Act also includes a number of significant changes that affect the way
patent applications will be prosecuted and may also affect patent litigation. These include allowing
third-party submission of prior art to the USPTO during patent prosecution and additional procedures to
attack the validity of a patent by the USPTO administered post grant proceedings, including reexamination
proceedings, inter
partes
review, post grant review and derivation proceedings. These adversarial proceedings at the USPTO review
patent claims without the presumption of validity afforded to U.S. patents in lawsuits in U.S. federal
courts, and use a lower burden of proof
than
used in litigation in U.S. federal courts. Therefore, it is generally considered easier for a competitor or
third party to have a U.S. patent invalidated in a USPTO post-grant review or inter
partes
review proceeding than in a litigation in a U.S. federal court.
In
addition, the patent positions of companies in the life sciences industry are particularly uncertain. Recent
U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances
and weakened the rights of patent owners in certain situations. This combination of events has created
uncertainty with respect to the validity and enforceability of patents, once obtained. Depending on future
actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents
could change in unpredictable ways. In addition, the complexity and uncertainty of European patent laws have
also increased in recent years. Complying with these laws and regulations could have a material adverse
effect on our existing patent portfolio and our ability to protect and enforce our intellectual property in
the future.
Obtaining
and maintaining our patent protection depends on compliance with various procedural, documentary, fee
payment and other requirements imposed by governmental patent agencies, and our patent protection could be
reduced or eliminated for noncompliance with these requirements.
Periodic
maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and patent
applications will be due to be paid to the USPTO and various government patent agencies outside the United
States over the lifetime of our patents and patent applications and any patent rights we may own or license
in the future. Additionally, the USPTO and various government patent agencies outside the United States
require compliance with a number of procedural, documentary, fee payment and other similar provisions during
the patent application process. In certain cases, an inadvertent lapse can be cured by payment of a late fee
or by other means in accordance with rules applicable to the particular jurisdiction. However, there are
situations in which noncompliance can result in abandonment or lapse of the patent or patent application,
resulting in partial or complete loss of patent rights in the relevant jurisdiction. If we or our licensors
fail to maintain the patents and patent applications covering or otherwise protecting our current or future
products, it could have a material adverse effect on our business. In addition, to the extent that we have
responsibility for taking any action related to the prosecution or maintenance of patents or patent
applications in-licensed from a third party, any failure on our part to maintain the in-licensed
intellectual property could jeopardize our rights under the relevant license and may have a material adverse
effect on our business, financial condition, results of operations, cash flows and prospects.
We
may be subject to claims by third parties asserting that our employees, consultants, independent contractors
or we have misappropriated their intellectual property, or claiming ownership of what we regard as our own
intellectual property and proprietary technology.
Many
of our employees were previously employed at universities or other life science, biotechnology or
pharmaceutical companies, including our competitors or potential competitors. We try to ensure that our
employees do not use the proprietary information or know-how of others in their work for us. We may,
however, be subject to claims that we or these employees have inadvertently or otherwise used or disclosed
intellectual property, trade secrets or other proprietary information of any such employee’s former
employer or that patents and applications we have filed to protect inventions of these individuals, even
those related to one or more of our current or future products, are rightfully owned by their former or
concurrent employer. Litigation may be necessary to defend against these claims. Even if we are successful
in defending ourselves, such litigation could result in substantial costs to us or be distracting to our
management. If we fail to defend any such claims, in addition to paying monetary damages, we may lose
valuable intellectual property rights or personnel or we could be required to obtain a license from such
third party to commercialize our technology or products. Such a license may not be available on an exclusive
basis or on commercially reasonable terms or at all.
In
addition, while we typically require our employees, consultants and independent contractors who may be
involved in the development of intellectual property to execute agreements assigning such intellectual
property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops
intellectual property that we regard as our own, or such agreements may be breached or alleged to be
ineffective, and the assignment may not be self-executing, which may result in claims by or against us
related to the ownership of such intellectual property or may result in such intellectual property becoming
assigned to third parties. If we fail in enforcing or defending any such claims, in addition to paying
monetary damages, we may lose valuable intellectual property rights. Even if we are successful in
prosecuting or defending against such claims, litigation could result in substantial costs and be a
distraction to our senior management and scientific personnel. Any of the foregoing could have a material
adverse effect on our business, financial condition, results of operations, cash flows and prospects.
We
may not be able to protect our intellectual property and proprietary rights throughout the world.
Filing,
prosecuting, and defending patents on current or future products in all countries throughout the world would
be prohibitively expensive, and the laws of foreign countries may not protect our rights to the same extent
as the laws of the
United
States. Consequently, we may not be able to prevent third parties from practicing our inventions in all
countries outside the United States, or from selling or importing products made using our inventions in and
into the United States or other jurisdictions. Third parties may use our technologies in jurisdictions where
we have not obtained or are unable to adequately enforce patent protection to develop their own products
and, further, may export otherwise infringing products to territories where we have patent protection but
enforcement is not as strong as that in the United States. These products may compete with our products, and
our patents or other intellectual property rights may not be effective or sufficient to prevent them from
competing.
Many
companies have encountered significant problems in protecting and defending intellectual property rights in
foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do
not favor the enforcement of patents, trade secrets, and other intellectual property protection,
particularly those relating to biotechnology products, which could make it difficult for us to stop the
infringement of our patents or marketing of competing products in violation of our intellectual property and
proprietary rights generally. Proceedings to enforce our intellectual property and proprietary rights in
foreign jurisdictions could result in substantial costs and divert our efforts and attention from other
aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could
put our patent applications at risk of not issuing, and could provoke third parties to assert claims against
us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any,
may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property and
proprietary rights around the world may be inadequate to obtain a significant commercial advantage from the
intellectual property that we develop or license.
Many
countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to
third parties. In addition, many countries limit the enforceability of patents against government agencies
or government contractors. In these countries, the patent owner may have limited remedies, which could
materially diminish the value of such patent. If we or any of our licensors is forced to grant a license to
third parties with respect to any patents relevant to our business, our competitive position may be
impaired, and our business, financial condition, results of operations, cash flows and prospects may be
adversely affected.
We
rely on confidentiality agreements that, if breached, may be difficult to enforce and could have a material
adverse effect on our business and competitive position.
Our
policy is to enter agreements relating to the non-disclosure and non-use of confidential information with
third parties, including our contractors, consultants, advisors and research collaborators, as well as
agreements that purport to require the disclosure and assignment to us of the rights to the ideas,
developments, discoveries and inventions of our employees and consultants while we employ them. However,
these agreements can be difficult and costly to enforce. Moreover, to the extent that our contractors,
consultants, advisors and research collaborators apply or independently develop intellectual property in
connection with any of our projects, disputes may arise as to the proprietary rights to the intellectual
property. If a dispute arises, a court may determine that the right belongs to a third party, and
enforcement of our rights can be costly and unpredictable. In addition, we rely on trade secrets and
proprietary know-how that we seek to protect in part by confidentiality agreements with our employees,
contractors, consultants, advisors or others. Despite the protective measures we employ, we still face the
risk that:
•these
agreements may be breached;
•these
agreements may not provide adequate remedies for the applicable type of breach; or
•our
trade secrets or proprietary know-how will otherwise become known.
Any
breach of our confidentiality agreements or our failure to effectively enforce such agreements would have a
material adverse effect on our business and competitive position.
If
our trademarks and trade names are not adequately protected, we may not be able to build name recognition in
our markets of interest and our business, financial condition, results of operations, cash flows and
prospects may be adversely affected.
Our
trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be
infringing on other marks. We may not be able to protect our rights to these trademarks and trade names or
may be forced to stop using these names or marks which we need for name recognition by potential partners or
customers in our markets of interest. During trademark registration proceedings, we may receive rejections.
Although we would be given an opportunity to respond to those rejections, we may be unable to overcome such
rejections. In addition, in the USPTO and in comparable agencies in many foreign jurisdictions, third
parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered
trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks
may not survive such proceedings. If we are unable to establish name recognition based on our trademarks and
trade names, we may not
be
able to compete effectively and our business, financial condition, results of operations, cash flows and
prospects may be adversely affected.
Intellectual
property rights do not necessarily address all potential threats.
The
degree of future protection afforded by our proprietary and intellectual property rights is uncertain
because such rights offer only limited protection and may not adequately protect our rights or permit us to
gain or keep our competitive advantage. For example:
•others
may be able to develop products that are similar to, or better than, our current or future products in a way
that is not covered by the claims of the patents we license or may own currently or in the future;
•we,
or our licensing partners or current or future collaborators, might not have been the first to make the
inventions covered by issued patents or pending patent applications that we license or may own currently or
in the future;
•we,
or our licensing partners or current or future collaborators, might not have been the first to file patent
applications for certain of our or their inventions;
•our
pending owned or in-licensed patent applications may not lead to issued patents;
•we
may choose not to file a patent for certain trade secrets or know-how, and a third party may subsequently
file a patent covering such intellectual property;
•our
competitors or other third parties might conduct research and development activities in countries where we
do not have patent rights and then use the information learned from such activities to develop competitive
products for sale in our major commercial markets;
•it
is possible that there are prior public disclosures that could invalidate our or our licensors’
patents;
•the
patents of third parties or pending or future applications of third parties, if issued, may have an adverse
effect on our business;
•any
patents that we obtain may not provide us with any competitive advantages or may ultimately be found not to
be owned by us, invalid or unenforceable; or
•we
may not develop additional proprietary technologies that are patentable.
Should
any of these events occur, they could significantly harm our business, financial conditions, results of
operations, cash flows and prospects.
Risks
Related to Our Indebtedness
Our
existing level of indebtedness may increase and adversely affect our business and growth prospects, growth
prospects, and financial condition, as well as our ability to raise additional capital on favorable terms,
which could, in turn, limit our ability to develop or acquire new products, services, technologies and
methodologies.
As
of December 31, 2022, we had total current and long-term indebtedness outstanding of approximately
$527.4 million, including term loans of $538.6 million, and unamortized debt issuance costs of $11.1
million. We may incur significant additional indebtedness in the future. If we increase our current
indebtedness levels, the risks related to our indebtedness as set forth herein could intensify.
Our
indebtedness, or any additional indebtedness we may incur, could require us to divert funds identified for
other purposes for debt service and impair our liquidity position. If we cannot generate sufficient cash
flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue
equity to obtain necessary funds. We do not know whether we will be able to take any of these actions on a
timely basis, on terms satisfactory to us or at all.
Our
indebtedness, the cash flow needed to satisfy our debt and the covenants contained in the Credit Agreement
have important consequences, including:
•limiting
funds otherwise available for financing our capital expenditures by requiring us to dedicate a portion of
our cash flows from operations to the repayment of debt and the interest on this debt;
•limiting
our ability to incur or prepay existing indebtedness, pay dividends or distributions, dispose of assets,
engage in mergers and consolidations, make acquisitions or other investments and make changes in the nature
of the business, among other things;
•making
us more vulnerable to rising interest rates, as certain of our borrowings, including borrowings under the
Credit Agreement, bear variable rates of interest; and
•making
us more vulnerable in the event of a downturn in our business.
Our
level of indebtedness may place us at a competitive disadvantage to our competitors that are not as highly
leveraged. Fluctuations in interest rates can increase borrowing costs. Increases in interest rates may
directly impact the amount of interest we are required to pay and reduce earnings accordingly. In addition,
tax laws, including the disallowance or deferral of tax deductions for interest paid on outstanding
indebtedness, could have an adverse effect on our liquidity and our business, financial condition, results
of operations, cash flows and prospects. Further, our Credit Agreement contains customary affirmative and
negative covenants and certain restrictions on operations that could impose operating and financial
limitations and restrictions on us, including restrictions on our ability to enter into particular
transactions and to engage in other actions that we may believe are advisable or necessary for our
business.
Variable
rate indebtedness that we have incurred or may in the future incur will subject us to interest rate risk,
which could cause our debt service obligations to increase significantly.
Certain
borrowings under our Credit Agreement bear variable rates of interest. Increase in interest rates directly
increase the amount of interest we are required to pay, and negatively impacts our net income and cash
flows, including cash available for servicing our indebtedness more generally.
We
may not be able to generate sufficient cash flow to service all of our indebtedness and may be forced to
take other actions to satisfy our debt service obligations, which actions may not be adequate or may impose
additional restrictions on us.
Our
ability to make scheduled debt service payments or to refinance outstanding debt obligations depends on our
financial and operating performance, which is subject to prevailing economic, industry and competitive
conditions and certain financial, business, economic and other factors beyond our control, including those
discussed under “Risk Related to Our Business and Strategy” above. We may not be able to
maintain a sufficient level of cash flow from operating activities to permit us to pay the principal,
premium, if any, and interest on our indebtedness. If we cannot meet our debt service obligations, the
holders of our indebtedness would have the right to accelerate such indebtedness and, to the extent such
indebtedness is secured, foreclose on our assets. This could have serious consequences to our business,
financial condition and results of operations and could cause us to become bankrupt or
insolvent.
Even
if this does not occur, any failure to make payments of interest and principal on our outstanding
indebtedness on a timely basis would likely result in a reduction of our creditworthiness, which would also
harm our ability to incur additional indebtedness.
If
our cash flows and other capital resources are insufficient to fund our debt service obligations, we may be
forced to reduce or delay capital expenditures and acquisitions, sell assets, raise additional capital or
seek to restructure or refinance our indebtedness. If we issue additional equity to repay all or a portion
of our indebtedness, our shareholders may experience significant dilution of their equity interests. Any
refinancing of our indebtedness could be at higher interest rates and may require us to comply with more
onerous covenants, including the requirement to maintain specified liquidity or other ratios or restrictions
on our ability to pay dividends or make acquisitions. If these alternative measures are not successful, we
may be required to sell material assets or operations to attempt to meet our debt service obligations.
Further, we may not be able to consummate these asset sales (including as a result of restrictions imposed
on us under the Credit Agreement) or sell assets at prices and on terms that we believe are fair, and any
proceeds that we do receive may not be adequate to meet any debt service obligations then due.
The
terms of the financing documents governing our Credit Agreement restrict our current and future operations,
particularly our ability to respond to changes or to take certain actions.
The
financing documents governing our Credit Agreement contain a number of restrictive covenants that impose
significant operating and financial restrictions on us and may limit our ability to engage in acts that may
be in our long-term best interests, including restrictions on our ability to:
•incur
additional indebtedness;
•incur
liens;
•merge,
dissolve, liquidate, amalgamate, consolidate or sell all or substantially all of our assets;
•declare
or pay certain dividends, payments or distribution or repurchase or redeem certain capital stock;
•permit
our subsidiaries to enter into agreements restricting their ability to pay dividends, make loans, incur
liens and sell assets; and
•make
certain investments.
These
restrictions could limit, potentially significantly, our operational flexibility and affect our ability to
finance our future operations or capital needs or to execute our business strategy.
Risks
Related to Our Organizational Structure
Our
principal asset is our interest in Maravai Topco Holdings LLC (“Topco LLC”), and, accordingly,
we depend on distributions from Topco LLC to pay our taxes and expenses, including payments under the Tax
Receivable Agreement. Topco LLC’s ability to make such distributions may be subject to various
limitations and restrictions.
We
are a holding company and have no material assets other than our ownership of equity interests in Topco LLC.
As such, we have no independent means of generating revenue or cash flow, and our ability to pay our taxes,
satisfy our obligations under the Tax Receivable Agreement and pay operating expenses or declare and pay
dividends, if any, in the future depends on the financial results and cash flows of Topco LLC and its
subsidiaries and distributions we receive from Topco LLC. There can be no assurance that Topco LLC and its
subsidiaries will generate sufficient cash flow to distribute funds to us or that applicable state law and
contractual restrictions, including negative covenants in debt instruments of Topco LLC and its
subsidiaries, will permit such distributions.
Topco
LLC is treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to any
entity-level U.S. federal income tax. For U.S. federal income tax purposes, taxable income of Topco LLC is
allocated to the LLC Unitholders of Topco LLC, including us. Accordingly, we incur income taxes on our
distributive share of any net taxable income of Topco LLC. Under the terms of the Topco LLC operating
agreement (the “LLC Operating Agreement”), Topco LLC is obligated to make tax distributions to
LLC Unitholders, including us. In addition to tax and dividend payments, we also incur expenses related to
our operations, including obligations to make payments under the Tax Receivable Agreement. Due to the
uncertainty of various factors, we cannot estimate the likely tax benefits we may realize as a result of our
purchase of LLC Units in Topco LLC (the “LLC Units”) and LLC Unit exchanges, and the resulting
amounts we are likely to pay out to LLC Unitholders pursuant to the Tax Receivable Agreement; however, we
estimate that such payments may be substantial. Under the LLC Operating Agreement, tax distributions shall
be made on a pro rata basis among the LLC Unitholders, and will be calculated without regard to any
applicable basis adjustment under Section 743(b) of The Internal Revenue Code (“the
Code”).
We
expect Topco LLC will continue to make cash distributions to the owners of LLC Units in amounts sufficient
to (1) fund all or part of their tax obligations in respect of taxable income allocated to them and (2)
cover our operating expenses, including payments under the Tax Receivable Agreement.
However,
Topco LLC’s ability to make such distributions may be subject to various limitations and restrictions,
such as restrictions on distributions that would violate either any contract or agreement to which Topco LLC
or its subsidiaries is then a party, including debt agreements, or any applicable law, or that would have
the effect of rendering Topco LLC or its subsidiaries insolvent. In addition, effective for taxable years
beginning after December 31, 2017, liability for adjustments to a partnership’s tax return may be
imputed on the partnership itself in certain circumstances, absent an election to the contrary. Topco LLC
may be subject to material liabilities pursuant to this legislation and related guidance if, for example,
its calculations of taxable income are incorrect. If we do not have sufficient funds to pay tax or other
liabilities or to fund our operations, we may have to borrow funds, which could materially adversely affect
our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. To
the extent that we are unable to make payments under the Tax Receivable Agreement, such payments generally
will be deferred and will accrue interest until paid. Nonpayment for a specified period, however, may
constitute a breach of a material obligation under the Tax Receivable Agreement and therefore accelerate
payments due under the Tax Receivable Agreement, unless, generally, such nonpayment is due to a lack of
sufficient funds.
Payments
under the Tax Receivable Agreement will be based on the tax reporting positions we determine. Although we
are not aware of any issue that would cause the IRS to challenge existing tax basis, a tax basis increase or
other tax attributes subject to the Tax Receivable Agreement, if any subsequent disallowance of tax basis or
other benefits were so determined by the IRS, we would not be reimbursed for any payments previously made
under the applicable Tax Receivable Agreement (although we would reduce future amounts otherwise payable
under such Tax Receivable Agreement). In addition, the actual state or local tax savings we realize may be
different than the amount of such tax savings we are deemed to realize under the Tax Receivable Agreement,
which will be based on an assumed combined state and local tax rate applied to our reduction in taxable
income as determined for U.S. federal income tax purposes as a result of the tax attributes subject to the
Tax Receivable Agreement. As a
result,
payments could be made under the Tax Receivable Agreement in excess of the tax savings we realize in respect
of the attributes to which the Tax Receivable Agreement relate.
Conflicts
of interest could arise between our shareholders and Maravai Life Sciences Holdings, LLC (“MLSH
1”), which may impede business decisions that could benefit our shareholders.
MLSH
1, which is controlled by GTCR, LLC (“GTCR”) and is the only holder of LLC Units other than us,
has the right to consent to certain amendments to the LLC Operating Agreement, as well as to certain other
matters. MLSH 1 may exercise these voting rights in a manner that conflicts with the interests of our
shareholders. Circumstances may arise in the future when the interests of MLSH 1 conflict with the interests
of our shareholders. As we control Topco LLC, we have certain obligations to MLSH 1 as an LLC Unitholder in
Topco LLC that may conflict with fiduciary duties our officers and directors owe to our shareholders. These
conflicts may result in decisions that are not in the best interests of shareholders.
The
Tax Receivable Agreement requires us to make cash payments to MLSH 1 and MLSH 2 in respect of certain tax
benefits to which we may become entitled, and we expect that the payments we will be required to make will
be substantial.
Pursuant
to the Tax Receivable Agreement we are required to make cash payments to MLSH 1 and MLSH 2, collectively,
equal to 85% of the tax benefits, if any, that we actually realize, or, in some circumstances, are deemed to
realize, as a result of (i) certain increases in the tax basis of assets of Topco LLC and its subsidiaries
resulting from purchases or exchanges of LLC Units, (ii) certain tax attributes related to the LLC Units
held by the corporations that merged into our corporate structure as part of the Organizational Transactions
(as discussed in Note 10 to our consolidated financial statements), Topco LLC and subsidiaries of Topco LLC
that existed prior to our initial public offering and (iii) certain other tax benefits related to our
entering into the Tax Receivable Agreement, including tax benefits attributable to payments that we make
under the Tax Receivable Agreement. Any payments made by us to MLSH 1 and MLSH 2 under the Tax Receivable
Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to
us. To the extent that we are unable to make payments under the Tax Receivable Agreement, such payments
generally will be deferred and will accrue interest until paid. Nonpayment for a specified period, however,
may constitute a breach of a material obligation under the Tax Receivable Agreement and therefore accelerate
payments due under the Tax Receivable Agreement, unless, generally, such nonpayment is due to a lack of
sufficient funds. Furthermore, our future obligation to make payments under the Tax Receivable Agreement
could make us a less attractive target for an acquisition, particularly in the case of an acquirer that
cannot use some or all of the tax benefits that may be deemed realized under the Tax Receivable Agreement.
The payments under the Tax Receivable Agreement are also not conditioned upon MLSH 1 maintaining a continued
ownership interest in Topco LLC.
The
actual amount and timing of any payments under the Tax Receivable Agreement will vary depending upon a
number of factors, including the timing of exchanges by MLSH 1, the amount of gain recognized by MLSH 1, the
amount and timing of the taxable income we generate in the future and the federal tax rates then
applicable.
We
expect that the aggregate payments that we may make under the Tax Receivable Agreement will be substantial.
Assuming no material changes in the relevant tax law, and that we earn sufficient taxable income to realize
all tax benefits that are subject to the Tax Receivable Agreement, we expect that future payments under the
Tax Receivable Agreement relating to the purchase by Maravai LifeSciences Holdings, Inc. of LLC Units from
MLSH 1 to be approximately $718.2 million and to range from approximately $42.3 million to $63.3 million per
year over the next 14 years and decline thereafter. As a result, we expect that aggregate payments under the
Tax Receivable Agreement over this 14-year period will be approximately $681.7 million. Future payments in
respect of subsequent exchanges or financing would be in addition to these amounts and are expected to be
substantial. The foregoing numbers are merely estimates—the actual payments could differ materially.
It is possible that future transactions or events could increase or decrease the actual tax benefits
realized and the corresponding Tax Receivable Agreement payments. There may be a material negative effect on
our liquidity if, as a result of timing discrepancies or otherwise, the payments under the Tax Receivable
Agreement exceed the actual benefits we realize in respect of the tax attributes subject to the Tax
Receivable Agreement and/or distributions to Maravai LifeSciences Holdings, Inc. by Topco LLC are not
sufficient to permit Maravai LifeSciences Holdings, Inc. to make payments under the Tax Receivable Agreement
after it has paid taxes.
Payments
under the Tax Receivable Agreement will be based on the tax reporting positions that we determine. Although
we are not aware of any issue that would cause the Internal Revenue Service (“IRS”) to challenge
a tax basis increase or the availability of tax attributes of the corporations merged into our corporate
structure as part of the Organizational Transactions, if any, we will not be reimbursed for any cash
payments previously made to MLSH 1 and MLSH 2 pursuant to the Tax Receivable Agreement if any tax benefits
initially claimed by us are subsequently disallowed, in whole or in part, by the IRS or other applicable
taxing authority. For example, if the IRS later asserts that we did not obtain a tax basis increase or
disallows (in whole or in part) the availability of Net Operating Losses (“NOLs”) due to a
potential ownership change under Section 382 of the Internal Revenue Code (“IRC” or “the
Code”), among other potential challenges, then we would not be reimbursed for any cash payments
previously made to MLSH 1 and MLSH 2 pursuant to the Tax Receivable Agreement with respect to such tax
benefits
that we had initially claimed. Instead, any excess cash payments made by us pursuant to the Tax Receivable
Agreement will be netted against any future cash payments that we might otherwise be required to make under
the terms of the Tax Receivable Agreement. Nevertheless, any tax benefits initially claimed by us may not be
disallowed for a number of years following the initial time of such payment or, even if challenged early,
such excess cash payment may be greater than the amount of future cash payments that we might otherwise be
required to make under the terms of the Tax Receivable Agreement. Accordingly, there may not be sufficient
future cash payments against which to net. The applicable U.S. federal income tax rules are complex, and
there can be no assurance that the IRS or a court will not disagree with our tax reporting positions. As a
result, it is possible that we could make cash payments under the Tax Receivable Agreement that are
substantially greater than our actual cash tax savings.
Under
the Tax Receivable Agreement, we are required to provide MLSH 1 and MLSH 2 with a schedule setting forth the
calculation of payments that are due under the TRA with respect to each taxable year in which a payment
obligation arises within ninety (90) days after the extended due date of our U.S. federal income tax return
for such taxable year. This calculation will be based upon the advice of our tax advisors. The calculation
will become final thirty (30) days after it is provided assuming that no objections are made. Payments under
the Tax Receivable Agreement will generally be made within five (5) business days after this schedule
becomes final pursuant to the procedures set forth in the Tax Receivable Agreement, although interest on
such payments will begin to accrue at a rate of Intercontinental Exchange London Interbank Offer Rate
(“LIBOR”) for a period of one month (or, if LIBOR ceases to be published, at a rate selected by
us in good faith, with characteristics similar to LIBOR or consistent with market practices generally, any
such rate, a “Replacement Rate”) plus 100 basis points from the due date (without extensions) of
such tax return. Generally, any late payments that may be made under the Tax Receivable Agreement will
continue to accrue interest at LIBOR (or a Replacement Rate, as applicable) plus 500 basis points until such
payments are made, including any late payments that we may subsequently make because we did not have enough
available cash to satisfy our payment obligations at the time at which they originally arose.
The
amounts that we may be required to pay to MLSH 1 and MLSH 2 under the Tax Receivable Agreement may be
accelerated in certain circumstances and may also significantly exceed the actual tax benefits that we
ultimately realize.
The
Tax Receivable Agreement provides that if (1) certain mergers, asset sales, other forms of business
combination or other changes of control were to occur, (2) we breach any of our material obligations under
the Tax Receivable Agreement or (3) at any time, we elect an early termination of the Tax Receivable
Agreement, then the Tax Receivable Agreement will terminate and our obligations, or our successor’s
obligations, to make payments under the Tax Receivable Agreement would accelerate and become immediately due
and payable. The amount due and payable in that circumstance is based on certain assumptions, including an
assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits
that are subject to the Tax Receivable Agreement. We may need to incur debt to finance payments under the
Tax Receivable Agreement to the extent our cash resources are insufficient to meet our obligations under the
Tax Receivable Agreement as a result of timing discrepancies or otherwise.
As
a result of a change in control, material breach or our election to terminate the Tax Receivable Agreement
early, (1) we could be required to make cash payments to MLSH 1 and MLSH 2 that are greater than the
specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are
subject to the Tax Receivable Agreement and (2) we would be required to make an immediate cash payment equal
to the anticipated future tax benefits that are the subject of the Tax Receivable Agreement discounted in
accordance with the Tax Receivable Agreement, which payment may be made significantly in advance of the
actual realization, if any, of such future tax benefits. In these situations, our obligations under the Tax
Receivable Agreement could have a substantial negative impact on our liquidity and could have the effect of
delaying, deferring or preventing certain mergers, asset sales, other forms of business combination, or
other changes of control. There can be no assurance that we will be able to finance our obligations under
the Tax Receivable Agreement.
Our
organizational structure, including the Tax Receivable Agreement, confers certain benefits upon MLSH 1 and
MLSH 2 that will not benefit the other common shareholders to the same extent as they will benefit MLSH 1
and MLSH 2.
Our
organizational structure, including the Tax Receivable Agreement, confers certain benefits upon MLSH 1, as
the only other LLC Unitholder in Topco LLC, and MLSH 2 that will not benefit the other holders of our Class
A common stock to the same extent. We have entered into a Tax Receivable Agreement with MLSH 1 and MLSH 2,
which will provide for the payment by us to MLSH 1 and MLSH 2, collectively, of 85% of the amount of tax
benefits, if any, that we actually realize, or in some circumstances are deemed to realize, as a result of
(i) certain increases in the tax basis of assets of Topco LLC and its subsidiaries resulting from purchases
or exchanges of LLC Units, (ii) certain tax attributes of certain of the entities (the “Blocker
Entities”) through which GTCR and other existing members of MLSH 1 and MLSH 2 held their ownership
interests in MLSH 1, Topco LLC and subsidiaries of Topco LLC that existed prior to our initial public
offering and (iii) certain other tax benefits related to our entering into the Tax Receivable Agreement,
including tax benefits attributable to payments that we make under the Tax Receivable Agreement. Due to the
uncertainty of various factors, we cannot estimate the likely tax benefits
we
will realize as a result of purchases of LLC Units and LLC Unit exchanges, and the resulting amounts we are
likely to pay out to MLSH 1 and MLSH 2 pursuant to the Tax Receivable Agreement; however, we estimate that
such payments may be substantial. Although we will retain 15% of the amount of such tax benefits, this and
other aspects of our organizational structure may adversely impact the future trading market for the Class A
common stock.
We
may not be able to realize all or a portion of the tax benefits that are currently expected to result from
the tax attributes covered by the Tax Receivable Agreement and from payments made under the Tax Receivable
Agreement.
Our
ability to realize the tax benefits that we currently expect to be available as a result of the attributes
covered by the Tax Receivable Agreement, the payments made pursuant to the Tax Receivable Agreement, and the
interest deductions imputed under the Tax Receivable Agreement all depend on a number of assumptions,
including that we earn sufficient taxable income each year during the period over which such deductions are
available and that there are no adverse changes in applicable law or regulations. Additionally, if our
actual taxable income were insufficient or there were additional adverse changes in applicable law or
regulations, we may be unable to realize all or a portion of the expected tax benefits and our cash flows
and shareholders’ equity could be negatively affected.
In
certain circumstances, Topco LLC will be required to make distributions to us and MLSH 1 and the
distributions may be substantial.
Topco
LLC is treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to U.S.
federal income tax. Instead, taxable income is allocated to its members, including us. We expect Topco LLC
will continue to make tax distributions quarterly to the LLC Unitholders in Topco LLC (including us), in
each case on a pro rata basis based on Topco LLC’s net taxable income and without regard to any
applicable basis adjustment under Section 743(b) of the Code. Funds used by Topco LLC to satisfy its tax
distribution obligations will not be available for reinvestment in our business. Moreover, these tax
distributions may be substantial, and will likely exceed (as a percentage of Topco LLC’s income) the
overall effective tax rate applicable to a similarly situated corporate taxpayer. As a result, it is
possible that we will receive distributions significantly in excess of our tax liabilities and obligations
to make payments under the Tax Receivable Agreement. While our Board may choose to distribute such cash
balances as dividends on our Class A common stock, they will not be required to do so, and may in their sole
discretion choose to use such excess cash for any purpose (including an investment of such cash into Topco
LLC) depending upon the facts and circumstances at the time of determination. See “Dividend
Policy.”
Unanticipated
changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax
returns could adversely affect our operating results and financial condition.
We
are subject to income taxes in the U.S. and certain foreign jurisdictions. Our tax liabilities will be
subject to the allocation of expenses in differing jurisdictions. Our future effective tax rates could be
subject to volatility or adversely affected by a number of factors, including:
•changes
in the valuation of our deferred tax assets and liabilities;
•expected
timing and amount of the release of any tax valuation allowances;
•expiration
of, or detrimental changes in, research and development tax credit laws; or
•changes
in tax laws, regulations or interpretations thereof.
In
addition, we may be subject to audits of our income, sales and other transaction taxes by U.S. federal,
state and foreign authorities. Outcomes from these audits could have an adverse effect on our operating
results and financial condition.
If
we were deemed to be an investment company under the Investment Company Act of 1940, as amended (the
“1940 Act”), applicable restrictions could make it impractical for us to continue our business
as contemplated and could have a material adverse effect on our business, financial condition, results of
operations, cash flows and prospects.
Under
Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment
company” for purposes of the 1940 Act if it (1) is, or holds itself out as being, engaged primarily,
or proposes to engage primarily, in the business of investing, reinvesting or trading in securities or (2)
is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in
securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the
value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated
basis. We do not believe that we are an “investment company,” as such term is defined in either
of those sections of the 1940 Act.
As
the sole managing member of Topco LLC, we will control and manage Topco LLC. On that basis, we believe that
our interest in Topco LLC is not an “investment security” under the 1940 Act. Therefore, we have
less than 40% of the value of our
total
assets (exclusive of U.S. government securities and cash items) in “investment securities.”
However, if we were to lose the right to manage and control Topco LLC, interests in Topco LLC could be
deemed to be “investment securities” under the 1940 Act.
We
intend to conduct our operations so that we will not be deemed to be an investment company. However, if we
were deemed to be an investment company, restrictions imposed by the 1940 Act, including limitations on our
capital structure and our ability to transact with affiliates, could make it impractical for us to continue
our business as contemplated and could have a material adverse effect on our business, financial condition,
results of operations, cash flows and prospects.
Risks
Related to Being a Public Company
We
are obligated to develop and maintain proper and effective internal control over financial reporting in
order to comply with Section 404 of the Sarbanes-Oxley Act. We may not complete our analysis of our internal
control over financial reporting in a timely manner, or these internal controls may not be determined to be
operating effectively, which may adversely affect investor confidence in us and, as a result, the value of
our Class A common stock.
Our
management is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements in accordance
with GAAP. Developing the system and processing documentation necessary to perform the evaluation needed to
comply with Section 404 of the Sarbanes-Oxley Act is a costly and challenging process. If we are unable to
assert that our internal control over financial reporting is effective, we could lose investor confidence in
the accuracy and completeness of our financial reports, which could cause the price of our Class A common
stock to decline, and we may be subject to investigation or sanctions by the SEC.
We
are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among
other things, the effectiveness of our internal control over financial reporting. This assessment must be
made yearly and must include disclosure of any material weaknesses identified by our management in our
internal control over financial reporting. We also must disclose changes made in our internal control and
procedures on a quarterly basis. Further, our independent registered public accounting firm must report on
the effectiveness of our internal control over financial reporting pursuant to Section 404 of the
Sarbanes-Oxley Act. Our independent registered public accounting firm may issue a report that is adverse in
the event it is not satisfied with the level at which our controls are documented, designed or operating,
which could cause the price of our Class A common stock to decline, and we may be subject to investigation
or sanctions by the SEC.
Additionally,
the existence of any material weakness or significant deficiency would require management to devote
significant time and incur significant expense to remediate any such material weaknesses or significant
deficiencies and management may not be able to remediate any such material weaknesses or significant
deficiencies in a timely manner. The existence of any material weakness in our internal control over
financial reporting could also result in errors in our financial statements that could require us to restate
our financial statements, cause us to fail to meet our reporting obligations and cause shareholders to lose
confidence in our reported financial information, all of which could materially and adversely affect our
business and stock price.
Risks
Related to Our Class A Common Stock
GTCR
controls us, and its interests may conflict with ours or yours in the future.
As
of December 31, 2022, investment entities affiliated with GTCR collectively controlled approximately
57% of the voting power of our outstanding common stock and therefore GTCR controls the vote of all matters
submitted to a vote of our shareholders. This control enables GTCR to control the election of the members of
the Board and all other corporate decisions. Even when GTCR ceases to control a majority of the total voting
power, for so long as GTCR continues to own a significant percentage of our Class A common stock, GTCR will
still be able to significantly influence the composition of our Board and the approval of actions requiring
shareholder approval. Accordingly, for such period of time, GTCR will have significant influence with
respect to our management, business plans and policies, including the appointment and removal of our
officers, decisions on whether to raise future capital and amending our charter and bylaws, which govern the
rights attached to our Class A common stock. In particular, for so long as GTCR continues to own a
significant percentage of our Class A common stock, GTCR will be able to cause or prevent a change of
control of us or a change in the composition of our Board and could preclude any unsolicited acquisition of
us. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares
of Class A common stock as part of a sale of us and ultimately might affect the market price of our Class A
common stock.
We
entered into a Director Nomination Agreement with GTCR that provides GTCR the right to nominate to the Board
a number of designees equal to at least: (i) 100% of the total number of directors comprising the Board, so
long as GTCR beneficially owns shares of Class A common stock and Class B common stock representing at least
40% of the total amount of shares of Class A common stock and Class B common stock it beneficially owned as
of November 19, 2020, (ii) 40% of the total number of directors, in the event that GTCR beneficially owns
shares of Class A common stock and Class B common stock representing at least 30% but less than 40% of the
total amount of shares of Class A common stock and Class B common stock it owned as of November 19, 2020,
(iii) 30% of the total number of directors, in the event that GTCR beneficially owns shares of Class A
common stock and Class B common stock representing at least 20% but less than 30% of the total amount of
shares of Class A common stock and Class B common stock it owned as of November 19, 2020, (iv) 20% of the
total number of directors, in the event that GTCR beneficially owns shares of Class A common stock and Class
B common stock representing at least 10% but less than 20% of the total amount of shares of Class A common
stock and Class B common stock it owns as of November 19, 2020 and (v) one director, in the event that GTCR
beneficially owns shares of Class A common stock and Class B common stock representing at least 5% of the
total amount of shares of Class A common stock and Class B common stock it owned as of November 19, 2020.
The Director Nomination Agreement provides that GTCR may assign such right to a GTCR affiliate. The Director
Nomination Agreement prohibits us from increasing or decreasing the size of our Board without the prior
written consent of GTCR.
GTCR
and its affiliates engage in a broad spectrum of activities, including investments in our industry
generally. In the ordinary course of their business activities, GTCR and its affiliates may engage in
activities where their interests conflict with our interests or those of our other shareholders, such as
investing in or advising businesses that directly or indirectly compete with certain portions of our
business or are suppliers or customers of ours. Our certificate of incorporation provides that none of GTCR,
any of its affiliates or any director who is not employed by us (including any non-employee director who
serves as one of our officers in both his or her director and officer capacities) or its affiliates has any
duty to refrain from engaging, directly or indirectly, in the same business activities or similar business
activities or lines of business in which we operate. GTCR also may pursue acquisition opportunities that may
be complementary to our business, and, as a result, those acquisition opportunities may not be available to
us. In addition, GTCR may have an interest in pursuing acquisitions, divestitures and other transactions
that, in its judgment, could enhance its investment, even though such transactions might involve risks to
you or may not prove beneficial.
We
are a “controlled company” within the meaning of the rules of NASDAQ and, as a result, we
qualify for and rely on exemptions from certain corporate governance requirements. You will not have the
same protections as those afforded to shareholders of companies that are subject to such governance
requirements.
GTCR
controls a majority of the voting power of our outstanding common stock. As a result, we are a
“controlled company” within the meaning of the corporate governance standards of NASDAQ. Under
these rules, a company of which more than 50% of the voting power for the election of directors is held by
an individual, group or another company is a “controlled company” and may elect not to comply
with certain corporate governance requirements, including:
•the
requirement that a majority of our Board consist of independent directors;
•the
requirement that we have a nominating and corporate governance committee that is composed entirely of
independent directors with a written charter addressing the committee’s purpose and
responsibilities;
•the
requirement that we have a compensation committee that is composed entirely of independent directors with a
written charter addressing the committee’s purpose and responsibilities; and
•the
requirement for an annual performance evaluation of the nominating and corporate governance and compensation
committees.
We
utilize these exceptions and do not have a majority of independent directors on our Board, our compensation
and nominating committee does not consist entirely of independent directors and is not subject to annual
performance evaluations, and we do not have a corporate governance committee. Accordingly, you will not have
the same protections afforded to shareholders of companies that are subject to all of the corporate
governance requirements of NASDAQ.
Provisions
of our corporate governance documents could make an acquisition of us more difficult and may prevent
attempts by our shareholders to replace or remove our current management, even if beneficial to our
shareholders.
Our
certificate of incorporation and bylaws and the Delaware General Corporation Law (the “DGCL”)
contain provisions that could make it more difficult for a third party to acquire us, even if doing so might
be beneficial to our shareholders. Among other things:
•these
provisions allow us to authorize the issuance of undesignated preferred stock, the terms of which may be
established and the shares of which may be issued without shareholder approval, and which may include
supermajority voting, special approval, dividend, or other rights or preferences superior to the rights of
shareholders;
•these
provisions provide for a classified board of directors with staggered three-year terms;
•these
provisions provide that, at any time when GTCR controls, in the aggregate, less than 40% of the outstanding
shares of our Class A common stock, directors may only be removed for cause, and only by the affirmative
vote of holders of at least 66 2⁄3% in voting power of all the then-outstanding shares of our stock
entitled to vote thereon, voting together as a single class;
•these
provisions prohibit shareholder action by written consent from and after the date on which GTCR controls, in
the aggregate, less than 35% in voting power of our stock entitled to vote generally in the election of
directors;
•these
provisions provide that for as long as GTCR controls, in the aggregate, at least 50% in voting power of our
stock entitled to vote generally in the election of directors, any amendment, alteration, rescission or
repeal of our bylaws by our shareholders will require the affirmative vote of a majority in voting power of
the outstanding shares of our capital stock and at any time when GTCR controls, in the aggregate, less than
50% in voting power of all outstanding shares of our stock entitled to vote generally in the election of
directors, any amendment, alteration, rescission or repeal of our bylaws by our shareholders will require
the affirmative vote of the holders of at least 66 2⁄3% in voting power of all the then-outstanding
shares of our stock entitled to vote thereon, voting together as a single class; and
•these
provisions establish advance notice requirements for nominations for elections to our Board or for proposing
matters that can be acted upon by shareholders at shareholder meetings; provided, however, at any time when
GTCR controls, in the aggregate, at least 10% in voting power of our stock entitled to vote generally in the
election of directors, such advance notice procedure will not apply to GTCR.
We
opted out of Section 203 of the DGCL, which generally prohibits a Delaware corporation from engaging in any
of a broad range of business combinations with any interested shareholder for a period of three years
following the date on which the shareholder became an interested shareholder. However, our certificate of
incorporation contains a provision that provides us with protections similar to Section 203, and prevents us
from engaging in a business combination with a person (excluding GTCR and any of its direct or indirect
transferees and any group as to which such persons are a party) who acquires at least 85% of our Class A
common stock for a period of three years from the date such person acquired such common stock, unless board
or shareholder approval is obtained prior to the acquisition. These provisions could discourage, delay or
prevent a transaction involving a change in control of our company. These provisions could also discourage
proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing
and cause us to take other corporate actions you desire, including actions that you may deem advantageous,
or negatively affect the trading price of our Class A common stock. In addition, because our Board is
responsible for appointing the members of our management team, these provisions could in turn affect any
attempt by our shareholders to replace current members of our management team.
These
and other provisions in our certificate of incorporation, bylaws and Delaware law could make it more
difficult for shareholders or potential acquirers to obtain control of our Board or initiate actions that
are opposed by our then-current Board, including actions to delay or impede a merger, tender offer or proxy
contest involving our company. The existence of these provisions could negatively affect the price of our
Class A common stock and limit opportunities for you to realize value in a corporate transaction.
Our
certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive
forum for certain litigation that may be initiated by our shareholders and the federal district courts of
the United States as the exclusive forum for litigation arising under the Securities Act, which could limit
our shareholders’ ability to obtain a favorable judicial forum for disputes with us.
Pursuant
to our certificate of incorporation, unless we consent in writing to the selection of an alternative forum,
the Court of Chancery of the State of Delaware is the sole and exclusive forum for any claims in state court
for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of
breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our
shareholders, (3) any action asserting a claim against us arising pursuant to any provision of the DGCL, our
certificate of incorporation or our bylaws or (4) any other action asserting a claim against us that is
governed
by the internal affairs doctrine; provided that for the avoidance of doubt, the forum selection provision
that identifies the Court of Chancery of the State of Delaware as the exclusive forum for certain
litigation, including any “derivative action,” will not apply to suits to enforce a duty or
liability created by the Securities Act, the Exchange Act or any other claim for which the federal courts
have exclusive jurisdiction. Our certificate of incorporation also provides that, unless we consent in
writing to the selection of an alternative forum, the federal district courts of the United States shall be
the exclusive forum for the resolution of any complaint asserting a cause of action arising under the
Securities Act. Our certificate of incorporation further provides that any person or entity purchasing or
otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to
the provisions of our certificate of incorporation described above. The forum selection provisions in our
certificate of incorporation may have the effect of discouraging lawsuits against us or our directors and
officers and may limit our shareholders’ ability to obtain a favorable judicial forum for disputes
with us. If the enforceability of our forum selection provisions were to be challenged, we may incur
additional costs associated with resolving such challenge. While we currently have no basis to expect any
such challenge would be successful, if a court were to find our forum selection provisions to be
inapplicable or unenforceable with respect to one or more of these specified types of actions or
proceedings, we may incur additional costs associated with having to litigate in other jurisdictions, which
could have an adverse effect on our business, financial condition, results of operations, cash flows and
prospects and result in a diversion of the time and resources of our employees, management and board of
directors.
Our
operating results and stock price may be volatile.
Our
quarterly operating results are likely to fluctuate in the future. In addition, securities markets worldwide
have experienced, and are likely to continue to experience, significant price and volume fluctuations,
including as a result of the current macroeconomic environment and fiscal and monetary policy uncertainty.
This market volatility, as well as other general economic, market or political conditions, could subject the
market price of our Class A common stock to wide price fluctuations regardless of our operating performance.
Our operating results and the trading price of our Class A common stock may fluctuate in response to various
factors, including those discussed throughout this section.
A
significant portion of our total outstanding shares of Class A common stock, including newly issued shares
of Class A common stock issued upon the exchange of UP-C interests by MLSH 1, may be sold into the market in
the near future. This could cause the market price of our Class A common stock to drop significantly, even
if our business is doing well.
Sales
of a substantial number of shares of our Class A common stock in the public market could occur at any time.
These sales, or the perception in the market that the holders of a large number of shares of Class A common
stock intend to sell shares, could reduce the market price of our Class A common stock. As of
December 31, 2022, we had 131,691,863 outstanding shares of Class A common stock, 21,681,033 of which
are subject to restrictions imposed by federal securities laws. All of these shares of Class A common stock
could, however, be sold from time to time, subject to restrictions imposed by federal securities laws. We
also register shares of Class A common stock that we issue under our equity compensation plans. Once we
register these shares, they can be freely sold in the public market upon issuance. Further, as of
December 31, 2022, an additional 123,669,196 shares of Class A common stock are issuable upon the
exchange by MLSH 1 of its interest in Topco.
Because
we have no current plans to pay regular cash dividends on our Class A common, you may not receive any return
on investment unless you sell your Class A common stock for a price greater than that which you paid for
it.
We
do not anticipate paying any regular cash dividends on our Class A common stock. Any decision to declare and
pay dividends in the future will be made at the discretion of our Board and will depend on, among other
things, our results of operations, financial condition, cash requirements, contractual restrictions and
other factors that our Board may deem relevant. In addition, our ability to pay dividends is, and may be,
limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur.
Therefore, any return on investment in our Class A common stock is solely dependent upon the appreciation of
the price of our Class A common stock on the open market, which may not occur.
We
may issue shares of preferred stock in the future, which could make it difficult for another company to
acquire us or could otherwise adversely affect holders of our Class A common stock, which could depress the
price of our Class A common stock.
Our
certificate of incorporation authorizes us to issue one or more series of preferred stock. Our Board has the
authority to determine the preferences, limitations and relative rights of the shares of preferred stock and
to fix the number of shares constituting any series and the designation of such series, without any further
vote or action by our shareholders. Our preferred stock could be issued with voting, liquidation, dividend
and other rights superior to the rights of our Class A common stock. The potential issuance of preferred
stock may delay or prevent a change in control of us, discouraging bids for our Class A common stock at a
premium to the market price, and materially adversely affect the market price and the voting and other
rights of the holders of our Class A common stock.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
Our
corporate headquarters and certain of our research and development operations are located in San Diego,
California. The facilities serve as the principal hub of operations for our nucleic acid production business
and were purpose built to expand the capacity of this business segment while adding specialized capabilities
in the form of clean rooms, air handling, waste and solvent handling, and GMP capabilities. Our facility
leases expire at varying dates through 2037, not including renewals that are at our option.
All
facilities are leased. A summary of our facilities is listed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Location
|
|
Approx.
Square Footage |
|
Segment
|
|
San
Diego, CA |
|
185,000
|
|
Nucleic
Acid Production |
|
Sterling,
VA |
|
21,000
|
|
Nucleic
Acid Production |
|
Leland,
NC |
|
46,000
|
|
Biologics
Safety Testing |
|
Southport,
NC |
|
20,000
|
|
Biologics
Safety Testing |
Item
3. Legal Proceedings
From
time to time, we may be involved in various legal proceedings and subject to claims that arise in the
ordinary course of business. Although the results of litigation and claims are inherently unpredictable and
uncertain, we are not currently a party to any legal proceedings the outcome of which, if determined
adversely to us, are believed to, either individually or taken together, have a material adverse effect on
our business, operating results, cash flows or financial condition. Regardless of the outcome, litigation
has the potential to have an adverse impact on us because of defense and settlement costs, diversion of
management resources, and other factors. See Item 1A. “Risk Factors—Risks Related to Our
Intellectual Property—Intellectual property litigation and other proceedings could cause us to spend
substantial resources and distract our personnel from their normal responsibilities” and “Risk
Factors—Risks Related to Our Intellectual Property—If we are sued for infringing,
misappropriating, or otherwise violating intellectual property rights of third parties, such litigation
could be costly and time consuming and could prevent or delay us from developing or commercializing our
current or future products.”
Item
4. Mine Safety Disclosures
None.
Part
II.
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market
Information
Our
Class A common stock trades on The Nasdaq Global Select Market under the symbol “MRVI.”
Our
Class B common stock is not listed nor traded on any stock exchange.
Stock
Performance Graph
The
following graph shows the total stockholder’s return on an investment of $100 in cash at market close
on November 20, 2020 (the first day of trading of our common stock), through December 31, 2022 for (i)
our Class A common stock, (ii) the Nasdaq Composite Index and (iii) the Nasdaq Biotechnology Index. Pursuant
to applicable Securities and Exchange Commission rules, all values assume reinvestment of pre-tax amount of
all dividends; however, no dividends have been declared on our Class A common stock to date. The stockholder
return shown in the graph below may not be indicative of future stock price performance, and we do not make
or endorse any predictions as to future stockholder return. This graph shall not be deemed “soliciting
material” or be deemed “filed” for purposes of Section 18 of the Securities Exchange Act
of 1934 as amended, or Exchange Act, or otherwise subject to the liabilities under that Section, and shall
not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as
amended, or Securities Act, whether made before or after the date hereof and irrespective of any general
incorporation language in any such filing.

Holders
of Common Stock
As
of February 21, 2023, there were two holders of record of our Class A common stock. This number does
not include a greater number of beneficial holders of our Class A common stock whose shares are held by
clearing houses, banks, brokers and other financial institutions which are aggregated into a single holder
of record.
As
of February 21, 2023, there was one holder of record of our Class B common stock.
Dividend
Policy
We
currently intend to retain all available funds and any future earnings to fund the development and growth of
our business and to repay indebtedness and, therefore, we do not anticipate paying any cash dividends in the
foreseeable future. Additionally,
because
we are a holding company, our ability to pay dividends on our Class A common stock may be limited by
restrictions on the ability of our subsidiaries to pay dividends or make distributions to us. Any future
determination to pay dividends will be at the discretion of our Board, subject to compliance with covenants
in current and future agreements governing our and our subsidiaries’ indebtedness, including our
Credit Agreement (the “Credit Agreement”) entered into in October 2020, and will depend on our
results of operations, financial conditions, capital requirements and other factors that our Board deems
relevant.
Equity
Compensation Plan Information
The
following table sets forth information as of December 31, 2022 regarding shares of our Class A common
stock that may be issued under the Company’s equity compensation plan, consisting of our 2020 Omnibus
Incentive Plan (the “2020 Plan) and our 2020 Employee Stock Purchase Plan (the
“ESPP”).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Plan
Category |
|
Number
of securities to be issued upon exercise of outstanding options, warrants and rights (a)
|
|
Weighted-average
exercise price of outstanding options, warrants and rights |
|
Number
of securities available for future issuance under equity compensation plans (excluding
securities reflected in column (a)) |
|
Equity
compensation plans approved by security holders (1)
(2)
|
|
4,464,722
|
|
$
|
17.14
|
|
|
52,446,489
|
|
Total
|
|
4,464,722
|
|
$
|
17.14
|
|
|
52,446,489
|
____________________
(1)Includes
10,740,041 shares that remain available for purchase under the 2020 Employee Stock Purchase Plan and
46,171,170 shares of common stock that remain available for grant under the 2020 Omnibus Incentive Plan. The
2020 Omnibus Incentive Plan provides for an automatic increase in the number of shares reserved for issuance
thereunder on January 1 of each calendar year during the term of the Plan, equal to the lesser of (a) 4.0%
of the aggregate number of shares and shares of Class B common stock outstanding on the final day of the
immediately preceding calendar year and (b) such smaller number of shares as determined by the Board. The
2020 Employee Stock Purchase Plan also provides for an automatic increase in the number of shares reserved
for issuance thereunder on January 1 of each calendar year during the term of the plan, equal to the lesser
of (a) 1.25% of the aggregate number of shares and shares of Class B common stock outstanding on the final
day of the immediately preceding calendar year and (b) such smaller number of shares as is determined by the
Board, provided that the shares reserved under the ESPP shall not exceed an aggregate of 10,948,877
shares.
(2)The
weighted average exercise price includes restricted stock unit awards that can be exercised for no
consideration. The weighted average exercise price excluding these restricted stock units is $26.45.
Item
6. Reserved
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You
should read the following discussion and analysis of financial condition and results of operations together
with our audited consolidated financial statements and related notes included elsewhere in this Annual
Report on Form 10-K. This discussion and analysis reflects our historical consolidated results of operations
and financial position, and contain forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those discussed in or implied by these forward-looking
statements. Factors that could cause or contribute to such differences include, but are not limited to,
those discussed in the section titled “Risk Factors.” Please also see the section titled
“Forward Looking Statements.” We were incorporated in August 2020 and, pursuant to the
organizational transactions described in Note 10 to our consolidated financial statements, became a holding
company whose principal asset is a controlling equity interest in Topco LLC. As the sole managing member of
Topco LLC, we operate and control the business and affairs of Topco LLC and its subsidiaries. Accordingly,
we consolidate Topco LLC in our consolidated financial statements and report a non-controlling interest
related to the portion of Topco LLC not owned by us. Because the organizational transactions were considered
transactions between entities under common control, the consolidated financial statements for periods prior
to the organizational transactions and the initial public offering have been adjusted to combine the
previously separate entities for presentation purposes. Unless otherwise noted or the context otherwise
requires, references in this Annual Report on Form 10-K to “we,” “us” or
“our” refer to Maravai LifeSciences Holdings, Inc. and its subsidiaries.
This
discussion and analysis generally addresses 2022 and 2021 items and year-over-year comparisons between 2022
and 2021. Discussions of 2020 items and year-over-year comparisons between 2021 and 2020 that are not
included in this Annual Report on Form 10-K can be found in Part II, Item 7 of our 2021 Annual Report on
Form 10-K filed with the SEC on March 1, 2022.
Overview
We
are a leading life sciences company providing critical products to enable the development of drug therapies,
diagnostics, novel vaccines and support research on human diseases. Our customers include the top global
biopharmaceutical companies ranked by research and development expenditures according to industry
consultants, and many other emerging biopharmaceutical and life sciences research companies, as well as
leading academic research institutions and in
vitro
diagnostics companies. Our products address the key phases of biopharmaceutical development and include
complex nucleic acids for diagnostic and therapeutic applications, antibody-based products to detect
impurities during the production of biopharmaceutical products, and products to detect the expression of
proteins in tissues of various species.
We
have and will continue to build a transformative life sciences products company by acquiring businesses and
accelerating their growth through capital infusions and industry expertise. Biomedical innovation is
dependent on a reliable supply of reagents in the fields of nucleic acid production, biologics safety
testing and protein labeling. From inventive startups to the world’s leading biopharmaceutical,
vaccine, diagnostics and gene and cell therapy companies, these customers turn to us to solve their complex
discovery challenges and help them streamline and scale their supply chain needs beginning from research and
development through clinical trials to commercialization.
Our
primary customers are biopharmaceutical companies who are pursuing novel research and product development
programs. Our customers also include a range of government, academic and biotechnology institutions.
As
of December 31, 2022, we employed a team of over 610 full-time employees, approximately 18% of whom
have advanced degrees. We primarily utilize a direct sales model for our sales to our customers in North
America. Our international sales, primarily in Europe and Asia Pacific, are effected through a combination
of third-party distributors as well as via a direct sales model. The percentage of our total revenue derived
from customers in North America was 38.4% and 39.7% for the years ended December 31, 2022 and 2021,
respectively.
We
generated revenue of $883.0 million and $799.2 million for the years ended December 31, 2022 and 2021,
respectively.
Total
revenue by segment was $813.1 million in Nucleic Acid Production and $69.9 million in Biologics Safety
Testing for the year ended December 31, 2022. Total revenue by segment was $711.9 million in Nucleic
Acid Production, $68.4 million in Biologics Safety Testing and $19.0 million in Protein Detection for the
year ended December 31, 2021. We divested our Protein Detection segment in September 2021, and since
then operate two business segments only, Nucleic Acid Production and Biologics Safety Testing.
We
focus a substantial portion of our resources supporting our core business segments. We are actively pursuing
opportunities to expand our customer base both domestically and internationally by fostering strong
relationships with both existing and new customers and distributors. Our management team has experience
working with biopharmaceutical, vaccine, diagnostics and gene and cell therapy companies as well as academic
and research scientists. We also intend to continue making investments in our overall infrastructure and
business segments to support our growth. We incurred aggregate selling, general, and administrative expenses
of $129.3 million and $100.1 million for the years ended December 31, 2022 and 2021
respectively.
Our
research and development efforts are geared towards meeting our customers’ needs. We incurred research
and development expenses of $18.4 million and $15.2 million for the years ended December 31, 2022 and
2021, respectively. We intend to continue to invest in research and development and new products and
technologies to support our customers’ needs for the foreseeable future.
2022
and Recent Developments
Acquisitions
In
January 2022, we completed the acquisition of MyChem, LLC (“MyChem”), a privately-held San
Diego, California-based provider of ultra-pure nucleotides to customers in the diagnostics, pharma, genomics
and research markets, for a total purchase consideration of $257.9 million, which includes an estimated fair
value of contingent consideration of $7.8 million as of the acquisition date. As a result of the
acquisition, we own all the outstanding interest in MyChem. Our consolidated results of operations for the
year ended December 31, 2022 include the operating results of MyChem from the acquisition date. See
Note 2 to our consolidated financial statements for additional information.
In
January 2023, we completed the acquisition of Alphazyme, LLC (“Alphazyme”), a privately-held
original equipment manufacturer (“OEM”) provider of custom, scalable, molecular biology enzymes
to customers in the genetic analysis and nucleic acid synthesis markets. The total consideration to acquire
Alphazyme consisted of a base cash purchase price of $70.0 million, subject to customary post-closing
adjustments, and potential performance payments payable in cash of up to $75.0 million.
Government
Assistance
In
May 2022, TriLink entered into a cooperative agreement (“Cooperative Agreement”) with the U.S.
Department of Defense, as represented by the Joint Program Executive Office for Chemical, Biological,
Radiological and Nuclear Defense on behalf of the Biomedical Advanced Research and Development Authority
(“BARDA”), within the U.S. Department of Health and Human Services, to advance the development
of domestic manufacturing capabilities and to expand TriLink’s domestic production capacity for
products critical to the development and manufacture of mRNA vaccines and therapeutics, including nucleoside
triphosphates and CleanCap®,
TriLink’s proprietary co-transcriptional mRNA capping reagents.
TriLink
is expanding its San Diego manufacturing campus by making a significant investment in additional cleanroom
and small molecule manufacturing space, implementing automation systems and adding support areas to augment
production capacity (the “Flanders San Diego Facility”). Pursuant to certain requirements, BARDA
awarded TriLink an amount equal to 50% of the construction and validation costs currently budgeted for the
Flanders San Diego Facility. See Note 6 to our consolidated financial statements for additional
information.
Trends
and Uncertainties
COVID-19
Related Revenue Trends and Uncertainties
Since
the start of the COVID-19 pandemic in early 2020, our results of operations and cash flows have
substantially benefited from the strong demand for COVID-19 related products and services, including our
proprietary CleanCap® analogs and highly modified RNA products, particularly mRNA. We estimate that
revenue from COVID-19 related products and services represented approximately 67.9% and 69.7%, respectively,
of our total revenues for the years ended December 31, 2022 and 2021, respectively. However, we believe
the second quarter of 2022 represented the highest revenue quarter for revenue attributable to our COVID-19
related products and services, with substantial declines in COVID-19 related revenue expected in the future.
In addition to the general market trend of reduced demand for COVID-19 related products and services as the
pandemic subsides, our COVID-19 related revenue for 2023 may be negatively impacted by unused inventory of
our products that our customers have on hand. We are unable to estimate the impact of this unused inventory
on future demand given both binding contractual commitments by our customers for additional purchases and
our customers generally having not provided us with detailed inventory data. Our longer-term revenue
prospects for COVID-19 related products are highly uncertain but are expected to be substantially less than
pandemic highs. There are various political, social, economic and regulatory factors that could influence
the ongoing manufacture and supply of COVID-19 vaccines, and in turn, our longer-term COVID-19 related
revenue, including: the emergence, duration and intensity of new virus variants; emerging information
concerning the severity and incidence of the virus and its variants; competition faced by our customers from
other COVID-19 vaccine manufacturers or developers of alternative treatments; the availability and
administration of pediatric and booster vaccinations, vaccine supply constraints, vaccine hesitancy and the
effectiveness of vaccines against new virus strains; the lapsing of the public health emergency declaration
made pursuant to Section 319 of the Public Health Service Act in January 2020; political and social debate
relating to the need for, efficacy of, or side effects related to one or more specific COVID-19 vaccines;
and the U.S. and global macroeconomic conditions, including impacts resulting from supply chain constraints,
labor market shortages and inflationary pressures. This contraction in COVID-19 related demand will
significantly decrease our revenue and cash flow, which in turn could have a material adverse impact on our
operating results and financial condition in the future.
Other
Trends and Uncertainties
Biopharmaceutical
customers are increasingly relying on outside parties to provide important inputs and services for their
clinical research and manufacturing, a development driving growth for suppliers with unique capabilities and
the ability to manufacture at an appropriate scale to support customer programs. We believe that suppliers
like ourselves, with this rare combination of capabilities, proprietary products and the required investment
in manufacturing and quality systems, are benefiting from rapid growth as biopharmaceutical customers seek
to partner with a small number of trusted suppliers. In addition to the continued trend toward outsourcing,
several market developments are driving increased growth, in our addressable market segments, including: (i)
pivot toward mRNA vaccines driven in part by the success of mRNA COVID-19 vaccines; (ii) rapid growth in
development of cell and gene therapies; (iii) large and growing pipeline of protein-based therapeutics; and
(iv) rise in molecular diagnostics driven by COVID-19.
Our
Biologics Safety Testing business continues to see headwinds from business in Asia, seeing impacts from the
ongoing COVID-19 pandemic lockdowns in China and our ongoing decisions not to ship products into Russia. See
more information under Part I, Item 1. Business.
How
We Assess Our Business
We
consider a variety of financial and operating measures in assessing the performance of our business. The key
measures we use to determine how our business is performing are revenue and Adjusted EBITDA.
Adjusted
EBITDA is a non-GAAP financial measure that we define as net income (loss) adjusted for interest, provision
for income taxes, depreciation, amortization and equity-based compensation expenses. Adjusted EBITDA
reflects further adjustments to eliminate the impact of certain items, including certain non-cash and other
items, that we do not consider representative of our ongoing operating performance. We also present Adjusted
Free Cash Flow, which is a non-GAAP measure that we define as Adjusted EBITDA less capital
expenditures.
Management
uses Adjusted EBITDA to evaluate the financial performance of our business and the effectiveness of our
business strategies. We present Adjusted EBITDA and Adjusted Free Cash Flow because we believe they are
frequently used by analysts, investors and other interested parties to evaluate companies in our industry,
and they facilitate comparisons on a consistent basis across reporting periods. Further, we believe they are
helpful in highlighting trends in our operating results because they exclude items that are not indicative
of our core operating performance. Adjusted EBITDA is also a component of the financial covenant under our
credit agreement that governs our ability to access more than $63.0 million in aggregate letters of
credit and available borrowings under our revolving credit facility. In addition, if we borrow more than
$63.0 million, we are required to maintain a specified net leverage ratio. See “Liquidity
and Capital Resources—Sources of Liquidity—Debt Covenants”
for a discussion of this financial covenant.
Adjusted
EBITDA and Adjusted Free Cash Flow have limitations as analytical tools and you should not consider them in
isolation, or as substitutes for analysis of our results as reported under GAAP. We may in the future incur
expenses similar to the adjustments in the presentation of Adjusted EBITDA. In particular, we expect to
incur meaningful share-based compensation expense in the future. Other limitations include that Adjusted
EBITDA and Adjusted Free Cash Flow do not reflect:
•all
expenditures or future requirements for capital expenditures or contractual commitments;
•changes
in our working capital needs;
•provision
for income taxes, which may be a necessary element of our costs and ability to operate;
•the
costs of replacing the assets being depreciated, which will often have to be replaced in the future;
•the
non-cash component of employee compensation expense; and
•the
impact of earnings or charges resulting from matters we consider not to be reflective, on a recurring basis,
of our ongoing operations.
In
addition, Adjusted EBITDA and Adjusted Free Cash Flow may not be comparable to similarly titled measures
used by other companies in our industry or across different industries.
Components
of Results of Operations
Revenue
Our
revenue consists primarily of product revenue and, to a much lesser extent, service revenue. We generated
total consolidated revenue of $883.0 million and $799.2 million for the years ended December 31, 2022
and 2021, respectively, through the following segments: (i) Nucleic Acid Production,
(ii) Biologics Safety Testing and (iii) Protein Detection. We divested our Protein Detection
segment in September 2021, and since then operate two business segments only, Nucleic Acid Production and
Biologics Safety Testing.
Nucleic
Acid Production Segment
Our
Nucleic Acid Production segment focuses on the manufacturing and sale of highly modified nucleic acids
products to support the needs of customers’ research, therapeutic and vaccine programs. This segment
also provides research products for labeling and detecting proteins in cells and tissue samples.
Biologics
Safety Testing Segment
Our
Biologics Safety Testing segment focuses on manufacturing and selling biologics safety and impurity tests
and assay development services that are utilized by our customers in their biologic drug manufacturing
activities.
Protein
Detection Segment
Our
Protein Detection segment products, which included a portfolio of labeling and visual detection reagents,
were purchased by our scientific research customers for their tissue-based protein detection and
characterization needs. In September 2021, we completed the divestiture of Vector Laboratories, Inc. and
subsidiaries (“Vector”), which made up our Protein Detection segment.
Cost
of Revenue
Cost
of revenue associated with our products primarily consists of manufacturing related costs incurred in the
production process, including personnel and related costs, equity-based compensation expense, inventory
write-downs, costs of materials, labor and overhead, packaging and delivery costs and allocated costs,
including facilities, information technology, depreciation, and amortization of intangibles. Cost of revenue
associated with our services primarily consists of personnel and related costs, equity-based compensation
expense, cost of materials and allocated costs, including facilities and information technology costs. Costs
of services were not material for the years ended December 31, 2022 and 2021.
Operating
Expenses
Selling,
General and Administrative
Our
selling, general and administrative expenses primarily consist of salaries, benefits and equity-based
compensation expense for our employees in our commercial sales functions, marketing, executive, accounting
and finance, legal and human resource functions as well as travel expenses, professional services fees, such
as consulting, audit, tax and legal fees, general corporate costs and allocated costs, including facilities,
information technology and amortization of intangibles.
We
expect that our selling, general and administrative expenses will continue to increase, primarily due to
increased headcount and expanding facilities footprint to support anticipated long-term growth in the
business, costs incurred in increasing our presence globally, and increases in marketing activities to drive
awareness and adoption of our products and services.
Research
and Development
Research
and development costs primarily consist of salaries, benefits, equity-based compensation expense, outside
contracted services, cost of supplies, in-process research and development costs from asset acquisitions and
allocated facilities costs for employees engaged in research and development of products and services. We
expense all research and development costs in the period in which they are incurred. Payment made prior to
the receipt of goods or services to be used in research and development are recognized as prepaid assets
until the goods are received or services are rendered.
We
expect our research and development costs to fluctuate in future periods as we continue our research and
development efforts, including meeting our customers’ needs. These costs may fluctuate from period to
period due to the timing and scope of our development activities.
Change
in Estimated Fair Value of Contingent Consideration
In
the first quarter of 2022, we completed the acquisition of MyChem and recorded a contingent consideration
liability of $7.8 million. In the second quarter of 2022, we recorded a fair value adjustment to the
liability based on our assessment of the probability of achieving certain revenue thresholds and other
probability factors. This was due to a change in estimate associated with MyChem revenue projections
reaching thresholds that would trigger a contingent payment per the MyChem Securities Purchase Agreement
(the “MyChem SPA”).
Gain
on Sale of Business
In
the third quarter of 2021, we completed the sale of Vector, which represented our Protein Detection
business, to Voyager Group Holdings, Inc. (“Voyager”) and recorded a gain of $11.2
million.
Other
Income (Expense)
Interest
Expense
Interest
expense consist of interest costs and the related amortization of the debt discount and deferred issuance
costs on our outstanding debt. Interest expense also consists of changes in the fair value of our interest
rate cap agreement.
Interest
Income
Interest
income consists of interest earned on our cash balances held at financial institutions.
Loss
on Extinguishment of Debt
Loss
on extinguishment of debt represent the write-off of remaining unamortized debt discount and deferred
issuance costs on previously outstanding debt when we engage in refinancing activities.
Change
in Payable to Related Parties Pursuant to the Tax Receivable Agreement
The
Tax Receivable Agreement liability adjustment reflects changes in the Tax Receivable Agreement liability
recorded in our consolidated statements of financial condition primarily due to changes in our estimated
state apportionment and the corresponding change of our estimated state tax rate.
Income
Tax Expense
As
a result of our ownership of LLC Units in Topco LLC, we are subject to U.S. federal, state and local income
taxes with respect to our allocable share of any taxable income of Topco LLC and will be taxed at the
prevailing corporate tax rates.
Non-Controlling
Interests
Non-controlling
interests represent the portion of profit or loss, net assets and comprehensive income or loss of our
consolidated subsidiaries that is not allocable to the Company based on our percentage of ownership of such
entities. Income
or loss attributed to the non-controlling interests is based on the LLC Units outstanding during the period
and is presented on the consolidated statements of income. As of December 31, 2022, we hold 51.6% of
the outstanding LLC Units of Topco LLC and 48.4% of the outstanding LLC Units of Topco LLC are held by MLSH
1.
Results
of Operations
The
results of operations presented below should be reviewed in conjunction with the consolidated financial
statements and notes included elsewhere in this Annual Report on Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31, |
|
2022
|
|
2021
|
|
Change
|
|
(in
thousands, except per share data) |
|
|
|
Revenue
|
$
|
883,001
|
|
|
$
|
799,240
|
|
|
10.5
|
%
|
|
Operating
expenses: |
|
|
|
|
|
|
Cost
of revenue (1)
|
168,957
|
|
|
140,561
|
|
|
20.2
|
%
|
|
Selling,
general and administrative (1)
|
129,259
|
|
|
100,064
|
|
|
29.2
|
%
|
|
Research
and development (1)
|
18,369
|
|
|
15,219
|
|
|
20.7
|
%
|
|
Change
in estimated fair value of contingent consideration |
(7,800)
|
|
|
—
|
|
|
*
|
|
Gain
on sale of business |
—
|
|
|
(11,249)
|
|
|
*
|
|
|
|
|
|
|
|
Total
operating expenses |
308,785
|
|
|
244,595
|
|
|
26.2
|
%
|
|
Income
from operations |
574,216
|
|
|
554,645
|
|
|
3.5
|
%
|
|
Other
income (expense), net |
(22,744)
|
|
|
(23,880)
|
|
|
(4.8)
|
%
|
|
Income
before income taxes |
551,472
|
|
|
530,765
|
|
|
3.9
|
%
|
|
Income
tax expense |
60,809
|
|
|
61,515
|
|
|
(1.1)
|
%
|
|
Net
income |
$
|
490,663
|
|
|
$
|
469,250
|
|
|
4.6
|
%
|
|
Net
income attributable to non-controlling interests |
270,458
|
|
|
287,213
|
|
|
(5.8)
|
%
|
|
Net
income attributable to Maravai LifeSciences Holdings, Inc. |
$
|
220,205
|
|
|
$
|
182,037
|
|
|
21.0
|
%
|
|
|
|
|
|
|
|
Net
income per Class A common share attributable to Maravai LifeSciences Holdings, Inc.: |
|
|
|
|
|
|
Basic
|
$
|
1.67
|
|
|
$
|
1.59
|
|
|
|
|
Diluted
|
$
|
1.67
|
|
|
$
|
1.56
|
|
|
|
|
Weighted
average number of Class A common shares outstanding: |
|
|
|
|
|
|
Basic
|
131,545
|
|
|
114,791
|
|
|
|
|
Diluted
|
255,323
|
|
|
257,803
|
|
|
|
|
Non-GAAP
measures: |
|
|
|
|
|
|
Adjusted
EBITDA |
$
|
637,800
|
|
|
$
|
582,820
|
|
|
|
|
Adjusted
Free Cash Flow |
$
|
590,897
|
|
|
$
|
565,821
|
|
|
|
____________________
*Not
meaningful
(1)Includes
equity-based compensation expense as follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
2022
|
|
2021
|
|
Change
|
|
Cost
of revenue |
$
|
4,192
|
|
|
$
|
1,915
|
|
|
118.9
|
%
|
|
Selling,
general and administrative |
13,349
|
|
|
8,263
|
|
|
61.6
|
%
|
|
Research
and development |
1,129
|
|
|
280
|
|
|
303.2
|
%
|
|
Total
equity-based compensation expense |
$
|
18,670
|
|
|
$
|
10,458
|
|
|
78.5
|
%
|
Revenue
Consolidated
revenue by segment was as follows for the periods presented (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
Percentage
of Revenue |
|
2022
|
|
2021
|
|
Change
|
|
2022
|
|
2021
|
|
Nucleic
Acid Production |
$
|
813,069
|
|
|
$
|
711,864
|
|
|
14.2
|
%
|
|
92.1
|
%
|
|
89.1
|
%
|
|
Biologics
Safety Testing |
69,932
|
|
|
68,417
|
|
|
2.2
|
%
|
|
7.9
|
%
|
|
8.5
|
%
|
|
Protein
Detection |
—
|
|
|
18,959
|
|
|
*
|
|
—
|
%
|
|
2.4
|
%
|
|
Total
revenue |
$
|
883,001
|
|
|
$
|
799,240
|
|
|
10.5
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
____________________
*Not
meaningful
Total
revenue was $883.0 million for the year ended December 31, 2022 compared to $799.2 million for the year
ended December 31, 2021, representing an increase of $83.8 million, or 10.5%.
Nucleic
Acid Production revenue increased from $711.9 million for the year ended December 31, 2021 to $813.1
million for the year ended December 31, 2022, representing an increase of $101.2 million, or 14.2%. The
increase in Nucleic Acid Production was driven by demand for our proprietary CleanCap analogs as COVID-19
vaccine manufacturers scaled production earlier in the year, and for our highly modified RNA products as
this technology becomes incorporated into more therapeutic and vaccine development programs. For the year
ended December 31, 2022, we estimate that approximately $599.8 million, or 90.8%, of our $660.5 million
CleanCap revenue was a result of customer demand attributable to COVID-19 vaccines or other COVID-19 related
commercial products or developmental programs. For the year ended December 31, 2021, we estimate that
approximately $557.4 million, or 93.0%, of our $599.1 million CleanCap revenue was a result of customer
demand attributable to COVID-19 vaccines or other COVID-19 related commercial products or developmental
programs.
Biologics
Safety Testing revenue increased from $68.4 million for the year ended December 31, 2021 to $69.9
million for the year ended December 31, 2022, representing an increase of $1.5 million, or 2.2%. The
increase was driven by growth in the underlying markets supporting cell and gene therapies, biosimilar and
other biologic programs and growing adoption of MockV®
technology for viral clearance prediction during biopharmaceutical manufacturing.
There
was no Protein Detection revenue for the year ended December 31, 2022 due to the sale of our Protein
Detection business segment, which was completed in early September 2021.
Segment
Information
Management
has determined that adjusted earnings before interest, tax, depreciation and amortization is the profit or
loss measure used to make resource allocation decisions and evaluate segment performance. Adjusted EBITDA
assists management in comparing the segment performance on a consistent basis for purposes of business
decision-making by removing the impact of certain items that management believes do not directly reflect the
core operations and, therefore, are not included in measuring segment performance. We define Adjusted EBITDA
as net income before interest, taxes, depreciation and amortization, certain non-cash items and other
adjustments that we do not consider in our evaluation of ongoing operating performance from period to
period. Corporate costs, net of eliminations, are managed on a standalone basis and are not allocated to
segments.
We
do not allocate assets to our reportable segments as they are not included in the review performed by our
Chief Operating Decision Maker for purposes of assessing segment performance and allocating
resources.
As
of December 31, 2022, all of our long-lived assets were located within the United States.
The
following schedule includes revenue and adjusted EBITDA for each of our reportable operating segments (in
thousands). We have revised our presentation for the prior periods below to remove the presentation of Total
Adjusted EBITDA and reconcile the total of our reportable segments’ measure of profit or loss to
income before income taxes, in addition to net income, and removed corporate costs, net of eliminations from
total reportable segments’ adjusted EBITDA and included such amounts in the reconciliation to income
before income taxes. Additionally, we have revised our presentation for the prior
periods
below of our total reportable segments’ revenue, in which we removed intersegment eliminations from
our total reportable segment’s revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
2022
|
|
2021
|
|
|
|
|
|
Revenue:
|
|
|
|
|
Nucleic
Acid Production |
$
|
813,076
|
|
|
$
|
712,520
|
|
|
Biologics
Safety Testing |
69,932
|
|
|
68,417
|
|
|
Protein
Detection |
—
|
|
|
18,959
|
|
|
Total
reportable segments’ revenue |
883,008
|
|
|
799,896
|
|
|
Intersegment
eliminations |
(7)
|
|
|
(656)
|
|
|
Total
|
$
|
883,001
|
|
|
$
|
799,240
|
|
|
|
|
|
|
Segment
adjusted EBITDA: |
|
|
|
|
Nucleic
Acid Production |
$
|
638,337
|
|
|
$
|
565,254
|
|
|
Biologics
Safety Testing |
54,841
|
|
|
54,440
|
|
|
Protein
Detection |
—
|
|
|
6,391
|
|
|
Total
reportable segments’ adjusted EBITDA |
693,178
|
|
|
626,085
|
|
|
Reconciliation
of total reportable segments’ adjusted EBITDA to income before income taxes |
|
|
|
|
Amortization
|
(24,269)
|
|
|
(18,339)
|
|
|
Depreciation
|
(7,566)
|
|
|
(6,413)
|
|
|
Interest
expense |
(20,414)
|
|
|
(30,260)
|
|
|
Interest
income |
2,338
|
|
|
—
|
|
|
Corporate
costs, net of eliminations |
(55,378)
|
|
|
(43,265)
|
|
|
Other
adjustments: |
|
|
|
|
Acquisition
contingent consideration |
7,800
|
|
|
—
|
|
|
Acquisition
integration costs |
(13,362)
|
|
|
(44)
|
|
|
|
|
|
|
Equity-based
compensation |
(18,670)
|
|
|
(10,458)
|
|
|
|
|
|
|
Gain
on sale of business |
—
|
|
|
11,249
|
|
|
|
|
|
|
Merger
and acquisition related expenses |
(2,416)
|
|
|
(1,508)
|
|
|
Financing
costs |
(1,078)
|
|
|
(2,383)
|
|
|
Acquisition
related tax adjustment |
(349)
|
|
|
—
|
|
|
Tax
Receivable Agreement liability adjustment |
(4,102)
|
|
|
6,101
|
|
|
Chief
Executive Officer transition costs |
(2,426)
|
|
|
—
|
|
|
Other
|
(1,814)
|
|
|
—
|
|
|
Income
before income taxes |
551,472
|
|
|
530,765
|
|
|
Income
tax expense |
(60,809)
|
|
|
(61,515)
|
|
|
Net
income |
$
|
490,663
|
|
|
$
|
469,250
|
|
During
the year ended December 31, 2022, intersegment revenue was immaterial between the Nucleic Acid
Production and Biologics Safety Testing segments. During the year ended December 31, 2021, intersegment
revenue was $0.7 million between the Nucleic Acid Production and Protein Detection segments. The
intersegment sales and the related gross margin on inventory recorded at the end of the period are
eliminated for consolidation purposes. Internal selling prices for intersegment sales are consistent with
the segment’s normal retail price offered to external parties. There was no commission expense
recognized for intersegment sales for the years ended December 31, 2022 and 2021.
Non-GAAP
Financial Measures
Adjusted
EBITDA
A
reconciliation of net income to Adjusted EBITDA, which is a non-GAAP measure, is set forth below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
2022
|
|
2021
|
|
Net
income |
$
|
490,663
|
|
|
$
|
469,250
|
|
|
Add:
|
|
|
|
|
Amortization
|
24,269
|
|
|
18,339
|
|
|
Depreciation
|
7,566
|
|
|
6,413
|
|
|
Interest
expense |
20,414
|
|
|
30,260
|
|
|
Interest
income |
(2,338)
|
|
|
—
|
|
|
Income
tax expense |
60,809
|
|
|
61,515
|
|
|
EBITDA
|
601,383
|
|
|
585,777
|
|
|
Acquisition
contingent consideration (1)
|
(7,800)
|
|
|
—
|
|
|
Acquisition
integration costs (2)
|
13,362
|
|
|
44
|
|
|
|
|
|
|
Equity-based
compensation (3)
|
18,670
|
|
|
10,458
|
|
|
|
|
|
|
Gain
on sale of business (4)
|
—
|
|
|
(11,249)
|
|
|
|
|
|
|
Merger
and acquisition related expenses (5)
|
2,416
|
|
|
1,508
|
|
|
Financing
costs (6)
|
1,078
|
|
|
2,383
|
|
|
Acquisition
related tax adjustment (7)
|
349
|
|
|
—
|
|
|
Tax
receivable agreement liability adjustment (8)
|
4,102
|
|
|
(6,101)
|
|
|
Chief
Executive Officer transition costs (9)
|
2,426
|
|
|
—
|
|
|
Other
(10)
|
1,814
|
|
|
—
|
|
|
Adjusted
EBITDA |
$
|
637,800
|
|
|
$
|
582,820
|
|
____________________
(1)Refers
to the change in the estimated fair value of performance payments related to the acquisition of MyChem,
which was completed in January 2022.
(2)Refers
to incremental costs incurred to execute and integrate completed acquisitions, and retention payments in
connection with these acquisitions.
(3)Refers
to non-cash expense associated with equity-based compensation.
(4)Refers
to the gain on the sale of Vector, which was completed in September 2021.
(5)Refers
to diligence, legal, accounting, tax and consulting fees incurred associated with acquisitions that were
pursued but not consummated.
(6)Refers
to transaction costs related to the refinancing of our long-term debt and costs from a secondary offering of
our common stock that are not capitalizable or cannot be offset against proceeds from such
transactions.
(7)Refers
to non-cash expense associated with adjustments to the carrying value of the indemnification asset recorded
in connection with the acquisition of MyChem.
(8)Refers
to the adjustment of our Tax Receivable Agreement liability primarily due to changes in our estimated state
apportionment and the corresponding change of our estimated state tax rate.
(9)Refers
to legal fees and other costs associated with the previously announced Chief Executive Officer leadership
transition planned for the middle of 2023.
(10)Refers
to the loss recognized during the period associated with certain working capital and other adjustments
related to the sale of Vector, which was completed in September 2021, and a loss incurred on extinguishment
of debt.
Adjusted
Free Cash Flow
A
reconciliation of Adjusted Free Cash Flow, which is a non-GAAP measure that we define as Adjusted EBITDA
less capital expenditures, is set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
2022
|
|
2021
|
|
Adjusted
EBITDA |
$
|
637,800
|
|
|
$
|
582,820
|
|
|
Capital
expenditures (1)
|
(46,903)
|
|
|
(16,999)
|
|
|
Adjusted
Free Cash Flow |
$
|
590,897
|
|
|
$
|
565,821
|
|
____________________
(1)We
define capital expenditures as: (i) purchases of property and equipment which are included in cash flows
from investing activities, accounts payable and accrued expenses, offset by government funding recognized;
and (ii) construction costs determined to be lessor improvements recorded as prepaid lease payments and
right-of-use assets, including portions included in accounts payable and accrued expenses, offset by
government funding recognized.
Operating
Expenses
Operating
expenses include the following for the periods presented (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
Percentage
of Revenue |
|
2022
|
|
2021
|
|
Change
|
|
2022
|
|
2021
|
|
Cost
of revenue |
$
|
168,957
|
|
|
$
|
140,561
|
|
|
20.2
|
%
|
|
19.1
|
%
|
|
17.6
|
%
|
|
Selling,
general and administrative |
129,259
|
|
|
100,064
|
|
|
29.2
|
%
|
|
14.7
|
%
|
|
12.5
|
%
|
|
Research
and development |
18,369
|
|
|
15,219
|
|
|
20.7
|
%
|
|
2.1
|
%
|
|
1.9
|
%
|
|
Change
in estimated fair value of contingent consideration |
(7,800)
|
|
|
—
|
|
|
*
|
|
(0.9)
|
%
|
|
—
|
%
|
|
Gain
on sale of business |
—
|
|
|
(11,249)
|
|
|
*
|
|
—
|
%
|
|
(1.4)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses |
$
|
308,785
|
|
|
$
|
244,595
|
|
|
26.2
|
%
|
|
35.0
|
%
|
|
30.6
|
%
|
____________________
*Not
meaningful
Cost
of Revenue
Cost
of revenue increased by $28.4 million from $140.6 million for the year ended December 31, 2021 to
$169.0 million for the year ended December 31, 2022, or 20.2%. The increase in cost of revenue was
primarily attributable to an increase in inventory reserve of $8.0 million as a result of lower projected
manufacturing demand, and an increase in quality control costs of $6.6 million. The increase was further
driven by increases in amortization expense of $9.2 million for intangible assets recognized for the MyChem
acquisition, an increase in personnel costs of $6.2 million driven by higher headcount to support Company
growth, and an increase in facilities cost of $3.1 million due to additional facilities occupied. These were
partially offset by a $7.2 million decrease in labor and overhead costs driven by improved labor
efficiencies.
Gross
profit increased by $55.4 million from $658.7 million for the year ended December 31, 2021 to $714.0
million for the year ended December 31, 2022. The decrease in gross profit margin as a percentage of
sales was primarily attributable to increases in inventory reserve, quality control costs, and amortization
expense for newly acquired intangible assets. These are partially offset by a favorable product mix shift
compared to prior period.
Selling,
General and Administrative
Selling,
general and administrative expenses increased by $29.2 million from $100.1 million for the year ended
December 31, 2021 to $129.3 million for the year ended December 31, 2022, or 29.2%. The increase
was primarily driven by an increase in personnel costs of $10.6 million, an increase in marketing costs of
$7.5 million attributable to market studies conducted and increased advertising efforts to help elevate
market presence, an increase in services and other costs of $4.5 million which includes increased legal fees
and transaction costs associated with the acquisition of MyChem, and an increase in provision for credit
losses of $2.6 million driven by increases in outstanding receivables.
Research
and Development
Research
and development expenses increased by $3.2 million from $15.2 million for the year ended December 31,
2021 to $18.4 million for the year ended December 31, 2022, or 20.7%. The increase was primarily driven
by an increase in personnel costs of $11.7 million, including $9.3 million relating to retention payment
accruals associated with the acquisition of MyChem. This is partially offset by a decrease in supplies,
materials and services of $8.6 million primarily driven by contracted studies in the prior year aimed at
improvements for manufacturing processes.
Change
in Estimated Fair Value of Contingent Consideration
The
change in estimated fair value of contingent consideration of $7.8 million for the year ended
December 31, 2022 was due to the decrease in estimated fair value of the liability during the second
quarter of 2022 for the contingent payments associated with the acquisition of MyChem. This was due to a
change in estimate associated with MyChem revenue projections reaching thresholds that would trigger a
contingent payment per the MyChem SPA.
Gain
on Sale of Business
The
gain on sale of business of $11.2 million for the year ended December 31, 2021 was from the sale of Vector
in September 2021.
Other
Income (Expense)
Other
income (expense) includes the following for the periods presented (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
Percentage
of Revenue |
|
2022
|
|
2021
|
|
Change
|
|
2022
|
|
2021
|
|
Interest
expense |
$
|
(20,414)
|
|
|
$
|
(30,260)
|
|
|
(32.5)
|
%
|
|
(2.3)
|
%
|
|
(3.8)
|
%
|
|
Interest
income |
2,338
|
|
|
—
|
|
|
*
|
|
0.2
|
%
|
|
—
|
%
|
|
Loss
on extinguishment of debt |
(208)
|
|
|
—
|
|
|
*
|
|
0.0
|
%
|
|
—
|
%
|
|
Change
in payable to related parties pursuant to the Tax Receivable Agreement |
(4,102)
|
|
|
6,101
|
|
|
*
|
|
(0.5)
|
%
|
|
0.8
|
%
|
|
Other
income |
(358)
|
|
|
279
|
|
|
*
|
|
0.0
|
%
|
|
0.0
|
%
|
|
Total
other income (expense), net |
$
|
(22,744)
|
|
|
$
|
(23,880)
|
|
|
(4.8)
|
%
|
|
(2.6)
|
%
|
|
(3.0)
|
%
|
____________________
*Not
meaningful
Other
expense was $23.9 million for the year ended December 31, 2021 compared to $22.7 million for the year
ended December 31, 2022, representing a decrease of $1.1 million, or 4.8%. The decrease in expense was
attributable to a $9.8 million decrease in interest expense primarily due to a $10.3 million change in fair
value of the interest rate cap. The decrease was further driven by a $2.3 million increase in interest
income for interest earned on our new demand deposits held at financial institutions. These were partially
offset by a $10.2 million change in gain (loss) related to the payable to related parties pursuant to the
Tax Receivable Agreement as a result of changes in our estimated state income tax apportionment and the
corresponding change of our estimated state income tax rate.
Relationship
with GTCR, LLC (“GTCR”)
Prior
to our initial public offering (“IPO”), we utilized GTCR for certain services pursuant to an
advisory services agreement. Under this agreement, GTCR provided us with financial and management consulting
services in the areas of corporate strategy, budgeting for future corporate investments, acquisition and
divestiture strategies, and debt and equity financings. The advisory services agreement provided that we pay
a $0.1 million quarterly management fee to GTCR for these services. We also reimbursed GTCR for
out-of-pocket expenses incurred while providing these services. The advisory services agreement also
provided that certain of our subsidiaries pay placement fees to GTCR of 1.0% of the gross amount of debt or
equity financings. In connection with our IPO, this advisory services agreement was terminated.
During
the years ended December 31, 2022 and 2021, the Company made distributions of $150.2 million and $153.5
million for tax liabilities to MLSH 1.
We
are also a party to a Tax Receivable Agreement, or TRA, with MLSH 1, who is primarily owned by GTCR, and
MLSH 2 (see Note 14 to our consolidated financial statements). The TRA provides for the payment by us to
MLSH 1 and MLSH 2,
collectively,
of 85% of the amount of tax benefits, if any, that we actually realize, or in some circumstances are deemed
to realize, from exchanges of LLC Units (together with the corresponding shares of Class B common stock) for
Class A common stock, as a result of (i) certain increases in the tax basis of assets of Topco LLC and its
subsidiaries resulting from purchases or exchanges of LLC Units, (ii) certain tax attributes of the entities
acquired from MLSH 1 and MLSH 2 in connection with the Organizational Transactions, Topco LLC and
subsidiaries of Topco LLC that existed prior to the IPO, and (iii) certain other tax benefits related to our
entering into the TRA, including tax benefits attributable to payments that we make under the TRA
(collectively, the “Tax Attributes”). Payment obligations under the TRA are not conditioned upon
any Topco LLC unitholders maintaining a continued ownership interest in us or Topco LLC, and the rights of
MLSH 1 and MLSH 2 under the TRA are assignable. There is no stated term for the TRA, and the TRA will
continue until all tax benefits have been utilized or expired unless we exercise our right to terminate the
TRA for an agreed-upon amount.
We
made payments of $35.3 million to MLSH 1 and MLSH 2 pursuant to the TRA during the year ended
December 31, 2022, of which $1.1 million is related to interest. We made payments of $1.3 million to
MLSH 1 and MLSH 2 pursuant to the TRA during the year ended December 31, 2021. As of December 31,
2022, our liability under the TRA was $718.2 million.
Liquidity
and Capital Resources
Overview
We
have financed our operations primarily from cash flow from operations, borrowings under long-term debt
agreements and, to a lesser extent, the sale of our Class A common stock.
As
of December 31, 2022, we had cash of $632.1 million, retained earnings of $404.8 million, and net
income of $490.7 million for the fiscal year ended December 31, 2022. We also had positive cash flow
from operations of $536.0 million.
We
have relied on revenue derived from product and services sales, and equity and debt financings to fund our
operations to date.
Our
principal uses of cash have been to fund operations, acquisitions and capital expenditures, as well as make
tax distributions to MLSH 1, make TRA payments to MLSH 1 and MLSH 2 and make interest payments and mandatory
principal payments on our long-term debt.
We
plan to utilize our existing cash on hand, together with cash generated from operations, primarily to fund
our commercial and marketing activities associated with our products and services, continued research and
development initiatives, and ongoing investments into our manufacturing facilities to create efficiencies
and build capacity. We believe our cash on hand, cash generated from operations and continued access to our
credit facilities, will be sufficient to satisfy our cash requirements over the next 12 months and
beyond.
As
a result of our ownership of LLC Units in Topco LLC, the Company is subject to U.S. federal, state and local
income taxes with respect to its allocable share of any taxable income of Topco LLC and is taxed at the
prevailing corporate tax rates. In addition to tax expenses, we also will incur expenses related to our
operations and we will be required to make payments under the TRA with MLSH 1 and MLSH 2. Due to the
uncertainty of various factors, we cannot precisely quantify the likely tax benefits we will realize as a
result of LLC Unit exchanges and the resulting amounts we are likely to pay out to LLC Unitholders of Topco
LLC pursuant to the TRA; however, we estimate that such payments may be substantial. Assuming no changes in
the relevant tax law, and that we earn sufficient taxable income to realize all tax benefits that are
subject to the TRA, we expect that future payments under the TRA relating to the purchase by the Company of
LLC Units from MLSH 1 and the tax attributes to be approximately $718.2 million and to range over the next
14 years from approximately $42.3 million to $63.3 million per year and decline thereafter. Future payments
in respect of subsequent exchanges or financings would be in addition to these amounts and are expected to
be substantial. The foregoing numbers are estimates and the actual payments could differ materially. We
expect to fund these payments using cash on hand and cash generated from operations.
As
a result of a change of control, material breach, or our election to terminate the TRA early, (1) we could
be required to make cash payments to MLSH 1 and MLSH 2 that are greater than the specified percentage of the
actual benefits we ultimately realize in respect of the tax benefits that are subject to the TRA, and (2) we
will be required to make an immediate cash payment equal to the present value of the anticipated future tax
benefits that are the subject of the TRA, which payment may be made significantly in advance of the actual
realization, if any, of such future tax benefits. In these situations, our obligations under the TRA could
have a material adverse effect on our liquidity and could have the effect of delaying, deferring or
preventing certain mergers, asset sales, other forms of business combination, or other changes of control.
There can be no assurance that we will be able to finance our obligations under the TRA.
In
addition to payments to be made under the TRA, we are also required to make tax distributions to MLSH 1
pursuant to the LLC Operating Agreement for the portion of income passing through to them from Topco LLC.
During the years ended
December 31,
2022 and 2021, the Company made distributions of $150.2 million and $153.5 million for tax liabilities to
MLSH 1 under this agreement, respectively.
Credit
Agreement
The
Credit Agreement among Intermediate, Cygnus and TriLink, as the borrowers, Topco LLC, as holdings, the
lenders from time-to-time party thereto and Morgan Stanley Senior Funding, Inc., as administrative and
collateral agent (as amended, supplemented or otherwise modified, the “Credit Agreement”),
provides us with a term-loan facility (the “Term Loan”) totaling $600.0 million and a
revolving credit facility (the “Revolving Credit Facility”) of $180.0 million for letters
of credit and loans to be used for working capital and other general corporate financing purposes.
Borrowings under the Credit Agreement are unconditionally guaranteed by Topco LLC, along with the existing
and future material domestic subsidiaries of Topco LLC (subject to certain exceptions) as specified in the
respective guaranty agreements and are secured by a lien and security interest in substantially all of the
assets of existing and future material domestic subsidiaries of Topco LLC that are loan parties.
In
January 2022, the Company entered into an amendment (the “Amendment”) to the Credit Agreement
to: (i) refinance the existing $544.0 million aggregate principal balance on the First Lien Term Loan and to
replace it with a new Tranche B Term Loan (“Tranche B Term Loan”), (ii) replace the LIBOR-based
interest rate with a Term Secured Overnight Financing Rate (“SOFR”) based rate, and (iii) reduce
the interest rate margins applicable to the Term Loan and Revolving Credit Facilities under the Credit
Agreement. The previous interest rate margin on the facilities was, with respect to each LIBOR-based loan,
3.75% to 4.25% and, with respect to each base rate-based loan, 2.75% to 3.25% (depending, in each case, on
consolidated first lien leverage). Following the Amendment, the interest rate margin on the facilities is
3.00%, with respect to each Term SOFR-based loan, and 2.00%, with respect to each base rate-based loan.
Further, the Amendment reduced the base rate floor for the term loans from 2.00% to 1.50%, sets the floor
for Term SOFR-based term loans at 0.50% and sets the floor for Term SOFR-based revolving loans at 0.00%. No
other significant terms under the Credit Agreement were changed in connection with the Amendment.
The
Base Rate is defined in the Credit Agreement as the greatest of (i) the rate last quoted by The Wall Street
Journal as the “Prime Rate” in the United States, (ii) the NYFRB Rate plus 0.50% per annum,
(iii) the Term SOFR Rate for a one month interest period plus 1.00% per annum, (iv) solely with respect to
the Tranche B Term Loans, 1.50% per annum and (v) for any loans that are not Tranche B Term Loans, 1.00% per
annum. The “Term SOFR Rate,” as defined in the Credit Agreement, means with respect to any Term
SOFR Rate Borrowing and for any other tenor comparable to the applicable interest period, the Term SOFR
Reference Rate at approximately 5:00 a.m., Chicago time, two U.S. Government Securities Business Days prior
to the commencement of such tenor comparable to the applicable interest period, as such rate is published by
the CME Term SOFR Administrator; provided that in no event shall the Term SOFR Rate for any interest period
(i) for Tranche B Term Loans be less than 0.50% or (ii) for any other Loans, be less than 0.00%.
The
Tranche B Term Loan became repayable in quarterly payments of $1.4 million beginning in March 2022,
with all remaining outstanding principal due in October 2027. The Tranche B Term Loan includes
prepayment provisions that allow us, at our option, to repay all or a portion of the principal amount at any
time. The Revolving Credit Facility allows us to repay and borrow from time to time until October 2025,
at which time all amounts borrowed must be repaid. Subject to certain exceptions and limitations, we are
required to repay borrowings under the Tranche B Term Loan and Revolving Credit Facility with the proceeds
of certain occurrences, such as the incurrence of debt, certain equity contributions and certain asset sales
or dispositions.
Commencing
with the fiscal year ended December 31, 2021, and each fiscal year thereafter, the Credit Agreement requires
that we make mandatory prepayments on the Term Loan principal out of certain excess cash flow, subject to
certain step-downs based on the Company’s first lien net leverage ratio. The mandatory prepayment
shall be reduced to 25% or 0% of the calculated excess cash flow if the first lien net leverage ratio was
equal to or less than 4.75:1.00 or 4.25:1.00, respectively; however, no prepayment is required to the extent
excess cash flow calculated for the respective period is equal to or less than $10.0 million. As of
December 31, 2022, our first lien net leverage ratio was less than 4.25:1.00. Thus, a prepayment was
not required.
Accrued
interest under the Credit Agreement is payable by us (a) quarterly in arrears with respect to Base Rate
loans, (b) at the end of each interest rate period (or at each three-month interval in the case of
loans with interest periods greater than three months) with respect to Term SOFR Rate loans, (c) on the
date of any repayment or prepayment and (d) at maturity (whether by acceleration or otherwise). An
annual commitment fee is applied to the daily unutilized amount under the Revolving Credit Facility at
0.375% per annum, with one stepdown to 0.25% per annum based on Intermediate’s first lien net leverage
ratio.
Debt
Covenants
The
Credit Agreement includes financial covenants. One financial covenant is a consolidated first lien coverage
ratio measured as of the last day of each fiscal quarter. Another requires that, if as of the end of any
fiscal quarter the aggregate amount of
letters
of credit obligations and borrowings under the Revolving Credit Facility outstanding as of the end of such
fiscal quarter (excluding cash collateralized letters of credit obligations and letter of credit obligations
in an aggregate amount not in excess of $5.0 million at any time outstanding and for the first four fiscal
quarters ending after October 2020, borrowings of revolving credit loans made before October 2020) exceeds
35% of the aggregate amount of all Revolving Credit Commitments in effect as of such date, then the net
leverage ratio of Intermediate may not be greater than 8.00 to 1.00. For purposes of this covenant, the net
leverage ratio is calculated by dividing outstanding first lien indebtedness (net of cash) by Adjusted
EBITDA over the preceding four fiscal quarters.
The
Credit Agreement also contains negative and affirmative covenants in addition to the financial covenant,
including covenants that restrict our ability to, among other things, incur or prepay certain indebtedness,
pay dividends or distributions, dispose of assets, engage in mergers and consolidations, make acquisitions
or other investments, and make changes in the nature of the business. The Credit Agreement contains certain
events of default, including, without limitation, nonpayment of principal, interest or other obligations,
violation of the covenants, insolvency, court ordered judgments and certain changes of control. The Credit
Agreement also requires the Company to provide audited consolidated financial statements to the lenders no
later than 120 days after year-end.
As
of December 31, 2022, we were in compliance with these covenants.
As
of December 31, 2022, interest rate on the Term Loan was 6.96%.
Tax
Receivable Agreement
We
are a party to the TRA with MLSH 1 and MLSH 2. The TRA provides for the payment by us to MLSH 1 and MLSH 2,
collectively, of 85% of the amount of certain tax benefits, if any, that we actually realize, or in some
circumstances are deemed to realize, as a result of the Organizational Transactions, IPO and any subsequent
purchases or exchanges of LLC Units of Topco LLC. Based on our current projections of taxable income, and
before deduction of any specially allocated depreciation and amortization, we anticipate having enough
taxable income to utilize most of these tax benefits.
As
of December 31, 2022, our liability under the TRA was $718.2 million, representing 85% of the
calculated tax savings we anticipated being able to utilize in future years. We may record additional
liabilities under the TRA when LLC Units are exchanged in the future and as our estimates of the future
utilization of the Tax Attributes, net operating losses and other tax benefits change. We expect to make
payments under the TRA, to the extent they are required, within 125 days after the extended due date of our
U.S. federal income tax return for such taxable year. Interest on such payments will begin to accrue from
the due date (without extensions) of such tax return at a rate of LIBOR (or, if LIBOR ceases to be
published, a replacement rate) plus 100 basis points. Generally. any late payments will continue to accrue
interest at LIBOR (or a replacement rate, as applicable) plus 500 basis points until such payments are
made.
The
payment obligations under the TRA are obligations of Maravai LifeSciences Holdings, Inc. and not of Topco
LLC. Although the actual timing and amount of any payments that may be made under the TRA will vary, we
expect that the aggregate payments that we will be required to make to MLSH 1 and MLSH 2 will be
substantial. Any payments made by us under the TRA will generally reduce the amount of overall cash flow
that might have otherwise been available to us or to Topco LLC and, to the extent that we are unable to make
payments under the TRA for any reason, the unpaid amounts will be deferred and will accrue interest until
paid by us. We anticipate funding ordinary course payments under the TRA from cash flow from operations of
Topco LLC and its subsidiaries, available cash and/or available borrowings under the Credit Agreement.
Cash
Flows
The
following table summarizes our cash flows for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
2022
|
|
2021
|
|
Net
cash provided by (used in): |
|
|
|
|
Operating
activities |
$
|
535,977
|
|
|
$
|
368,570
|
|
|
Investing
activities |
(267,612)
|
|
|
105,655
|
|
|
Financing
activities |
(187,499)
|
|
|
(159,049)
|
|
|
Effects
of exchange rate changes on cash |
—
|
|
|
(88)
|
|
|
Net
increase in cash |
$
|
80,866
|
|
|
$
|
315,088
|
|
Operating
Activities
Net
cash provided by operating activities for the year ended December 31, 2022 was $536.0 million, which
was primarily attributable to a net income of $490.7 million, non-cash depreciation and amortization of
$31.8 million, amortization of right-of-use assets of $6.3 million, non-cash amortization of deferred
financing costs of $2.8 million, non-cash equity-based compensation of $18.7 million, non-cash deferred
income taxes of $42.3 million, and non-cash loss on the revaluation of liabilities under the TRA of $4.1
million. These were partially offset by a non-cash gain on the change in estimated fair value of contingent
consideration of $7.8 million, and a net cash outflow from the change in our operating assets and
liabilities of $45.1 million, which is net of government funding of $17.0 million. The net cash outflow from
the change in our operating assets includes $13.4 million relating to an increase in prepaid lease payments
for Flanders I (as defined in Note 7 to our consolidated financial statements).
Net
cash provided by operating activities for the year ended December 31, 2021 was $368.6 million, which
was primarily attributable to a net income of $469.3 million, non-cash depreciation and amortization of
$24.8 million, non-cash amortization of right-of-use assets of $8.8 million, non-cash amortization of
deferred financing costs of $2.7 million, non-cash equity-based compensation of $10.5 million, and non-cash
deferred income taxes of $46.9 million, partially offset by a non-cash gain on sale of business of $11.2
million, non-cash gain on the revaluation of liabilities under the TRA of $6.1 million, and a net cash
outflow from the change in our operating assets and liabilities of $176.6 million.
Investing
Activities
Net
cash used in investing activities for the year ended December 31, 2022 was $267.6 million, which was
primarily comprised of $239.0 million for the net cash consideration paid for the acquisition of MyChem, net
cash outflows of $17.1 million for property and equipment purchases, and $13.3 million of prepaid lease
payments for Flanders II (as defined in Note 7 to our consolidated financial statements).
Net
cash provided by investing activities for the year ended December 31, 2021 was $105.7 million, which
was primarily comprised of net cash receipts of $120.0 million from the sale of Vector. This was partially
offset by net cash outflows of $14.9 million for property and equipment purchases.
Financing
Activities
Net
cash used in financing activities for the year ended December 31, 2022 was $187.5 million, which was
primarily attributable to $150.2 million of distributions for tax liabilities to non-controlling interest
holders, required pursuant to the terms of the LLC Operating Agreement, $34.2 million of payments to MLSH 1
and MLSH 2 pursuant to the TRA, and $13.9 million of principal repayments of long-term debt. This was
partially offset by proceeds from borrowings of long-term debt of $8.5 million.
Net
cash used in financing activities for the year ended December 31, 2021 was $159.0 million, which was
primarily attributable to $153.5 million of distributions for tax liabilities to non-controlling interest
holders and $6.0 million of principal repayments of long-term debt.
Capital
Expenditures
Capital
expenditures for the year ended December 31, 2022 totaled $46.9 million, which is net of government
funding of $18.1 million. Capital expenditures, including costs incurred for lessor improvements, for the
year ending December 31, 2023 are projected to be in the range of $55.0 million to $65.0 million, which
is net of anticipated government funding of $4.3 million. This primarily includes new facility construction
costs recorded as prepaid lease payments and equipment purchases for the Flanders San Diego Facility.
Contractual
Obligations and Commitments
The
following table summarizes our contractual obligations and commitments as of December 31, 2022 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
due by period |
|
Total
|
|
1
year |
|
2
- 3 years |
|
4
- 5 years |
|
5+
years |
|
Operating
leases
(1)
|
$
|
71,370
|
|
|
$
|
9,886
|
|
|
$
|
20,690
|
|
|
$
|
17,414
|
|
|
$
|
23,380
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
obligations (2)
|
538,560
|
|
|
5,440
|
|
|
10,880
|
|
|
522,240
|
|
|
—
|
|
|
TRA
payments (3)
|
718,210
|
|
|
42,254
|
|
|
86,143
|
|
|
88,831
|
|
|
500,982
|
|
|
Unconditional
purchase obligations (4)
|
3,000
|
|
|
3,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Consideration
payable (5)
|
10,000
|
|
|
10,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other
commitments (6)
|
37,082
|
|
|
2,564
|
|
|
6,754
|
|
|
7,166
|
|
|
20,598
|
|
|
Total
|
$
|
1,378,222
|
|
|
$
|
73,144
|
|
|
$
|
124,467
|
|
|
$
|
635,651
|
|
|
$
|
544,960
|
|
_______________
(1)Represents
operating lease payment obligations, excluding any renewal options we are reasonably certain to execute and
have recognized as lease liabilities. See Note 7 to our consolidated financial statements for additional
information.
(2)Represents
long-term debt principal maturities, excluding interest. See Note 9 to our consolidated financial statements
for additional information.
(3)Reflects
the estimated timing of TRA payments as of December 31, 2022. Such payments could be due later than
estimated depending on the timing of our use of the underlying tax attributes. See "Risk Factors-Risks
Related to Our Organizational Structure" and Note 14 to our consolidated financial statements for additional
information regarding our liability under the TRA.
(4)Represents
firm purchase commitments to our suppliers.
(5)Represents
an additional amount we may be required to pay to the sellers of MyChem subject to the completion of certain
calculations associated with acquired inventory. See Note 2 to our consolidated financial statements for
additional information.
(6)Represents
the estimated timing and amounts of lease payments for the Flanders San Diego Facility that is under
construction.
Tax
distributions are required under the terms of the Topco LLC Agreement. As of December 31, 2022, we have
made tax distributions equal to the estimated obligation due for 2022. See Note 14 to our consolidated
financial statements for additional information regarding tax distributions.
Commencing
with the fiscal year ended December 31, 2021, and each fiscal year thereafter, the Credit Agreement requires
mandatory prepayments of the Term Loan principal upon certain excess cash flow, subject to certain
step-downs based on our first lien net leverage ratio. The mandatory prepayment shall be reduced to 25% or
0% of the calculated excess cash flow if the first lien net leverage ratio was equal to or less than
4.75:1.00 or 4.25:1.00, respectively; however, no prepayment shall be required to the extent excess cash
flow calculated for the respective period is equal to or less than $10.0 million.. As of December 31,
2022, our first lien net leverage ratio was less than 4.25:1.00.
In
connection with our acquisition of MyChem, we may be required to make certain payments to its sellers. We
may be required to make additional payments of up to $40.0 million to the sellers of MyChem dependent upon
meeting or exceeding defined revenue targets during fiscal 2022. We may also be required to make certain
payments of $20.0 million to them as of the second anniversary of the closing of the acquisition date as
long as the sellers of MyChem continue to be employed by TriLink. We cannot, at this time, determine when or
if the related targets will be achieved or whether the events triggering the commencement of payment
obligations will occur. Therefore, such payments were not included in the table above. See Notes 2 and 4 to
our consolidated financial statements for additional details.
Critical
Accounting Estimates
We
have prepared our consolidated financial statements in accordance with GAAP. Our preparation of these
consolidated financial statements requires us to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, expenses and related disclosures in the consolidated financial
statements. Our estimates are based on historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual
results could differ from these estimates under different assumptions or conditions and any such difference
may be material.
Our
significant accounting policies are described in more detail in Note 1 to our consolidated financial
statements. We believe the following discussion addresses our most critical accounting estimates used in the
preparation of our consolidated financial statements, which require subjective and complex judgments.
Income
Taxes
We
are subject to U.S. federal and state income taxes. We are the controlling member of Topco, LLC, which has
been, and will continue to be, treated as a partnership for U.S. federal and state income tax purposes.
Topco LLC’s subsidiaries are treated as pass-through entities for federal and state income tax
purposes. The income or loss generated by these entities is not taxed at the LLC level. As required by U.S.
tax law, income or loss generated by these LLCs passes through to their owners. As such, our tax provision
consists solely of the activities of Maravai Inc. and its subsidiaries prior to their disposal, as well as
our share of income generated by Topco LLC. We anticipate this structure to remain in existence for the
foreseeable future.
We
account for income taxes under the asset and liability method of accounting. We recognize deferred tax
assets and liabilities for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as for
operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted
tax rates expected to apply to taxable income in the years in which we expect to recover or settle those
temporary differences. We recognize the effect of a change in tax rates on deferred tax assets and
liabilities in the results of operations in the period that includes the enactment date. We reduce the
measurement of a deferred tax asset, if necessary, by a valuation allowance if it is more likely than not
that we will not realize some or all of the deferred tax asset.
The
realizability of the Company’s deferred tax asset related to its investment in Topco LLC depends on
the Company receiving allocations of tax deductions for its tax basis in the investment and on the Company
generating sufficient taxable income to fully offset such deductions. We believe it is more likely than not
that the Company will generate sufficient taxable income in the future to fully realize any deductions
allocated to it from Topco LLC associated with the reversal of its tax basis as of December 31, 2022.
However, a portion of the deferred tax asset may only be realizable through the sale or liquidation of the
investment and our ability to generate sufficient capital gains. As such, a valuation allowance of
$23.8 million has been recorded as of December 31, 2022 to reflect the deferred tax asset that is
more likely than not to not be realized.
We
account for uncertain tax positions by recognizing the financial statement effects of a tax position only
when, based upon technical merits, it is more likely than not that the position will be sustained upon
examination.
Significant
judgment is required in determining the accounting for income taxes. In the ordinary course of business,
many transactions and calculations arise where the ultimate tax outcome is uncertain. Our judgments,
assumptions and estimates relative to the accounting for income taxes take into account current tax laws,
our interpretation of current tax laws, and possible outcomes of future audits conducted by foreign and
domestic tax authorities. Although we believe that our estimates are reasonable, the final tax outcome of
matters could be different from our assumptions and estimates used when determining the accounting for
income taxes. Such differences, if identified in future periods, could have a material effect on the amounts
recorded in our consolidated financial statements.
Payable
to Related Parties Pursuant to the Tax Receivable Agreement
In
November 2020, we entered into a TRA with MLSH 1 and MLSH 2. The TRA provides for the payment by us to MLSH
1 and MLSH 2, collectively, of 85% of the amount of tax benefits, if any, that we actually realize, or in
some circumstances are deemed to realize from exchanges of LLC Units (together with the corresponding share
of Class B Common stock), as a result of (i) certain increases in the tax basis of assets of Topco LLC and
its subsidiaries resulting from purchases or exchanges of LLC Units, (ii) increase in the tax basis of
assets of Topco LLC received form LLC Units held by entities acquired from MLSH 1 and MLSH 2 in connection
with the Organizational Transactions (“the Blocker Entities”), Topco LLC and subsidiaries of
Topco LLC that existed prior to this offering and (iii) certain other tax benefits related to our entering
into the TRA, including tax benefits attributable to payments that we make under the TRA (collectively, the
“Tax Attributes”). The payment obligations under the TRA are not conditioned upon any LLC
Unitholder maintaining a continued ownership interest in us or Topco LLC and the rights of MLSH 1 and MLSH 2
under the TRA are assignable. We expect to benefit from the remaining 15% of the tax benefits, if any, that
we may actually realize.
We
accrue a liability for the payable to related parties for the TRA and a reduction to stockholders’
equity, when it is deemed probable that the Tax Attributes will be used to reduce our taxable income, as the
contractual percentage of the benefit of Tax Attributes that we expected to receive over a period of time.
The current portion, if any, of the liability is the amount estimated to be paid within one year of the
balance sheet date. For purposes of estimating the value of the payable to related parties for the TRA, the
tax benefit deemed realized by us and payable to MLSH 1 and MLSH 2 is computed by taking 85% of the
difference between undiscounted forecasted cash income tax liability over the term of benefit of the Tax
Attributes and the forecasted amount of such taxes that we would have been required to pay had there been no
Tax Attributes (i.e. a with-and-without analysis); provided that, for purposes of determining the tax
benefit with respect to state and local income taxes, use simplifying assumptions. The TRA will generally
apply to each of our taxable years, beginning with the taxable year that the TRA is entered into. There is
no maximum term for the TRA and the TRA will continue until all such tax benefits have been utilized or
expired unless we exercise our right to terminate the TRA for an agreed-upon amount equal to the estimated
present value of the remaining payments to be made under the agreement (calculated with certain assumptions,
including as to utilization of the
Tax
Attributes). We may record additional liabilities under the TRA when LLC Units of Topco LLC are exchanged in
the future and as our estimates of the future utilization of the tax benefits change. If, due to a change in
facts, these tax attributes are not utilized in future years, it is reasonably possible no amounts would be
paid under the TRA. In this scenario, the reduction of the liability under the TRA would result in a benefit
to our consolidated statements of income. Subsequent adjustments to the payable to related parties for the
TRA based on changes in anticipated future taxable income, which could include changes in estimated income
allocated to the partners of Topco LLC or apportionment of state income taxes, are recorded in our
consolidated statements of income.
The
actual Tax Attributes, as well as any amounts paid to MLSH 1 and MLSH 2 under the TRA, will vary depending
on a number of factors, including:
•the
timing of any future exchanges—for instance, the increase in any tax deductions will vary depending on
the fair value, which may fluctuate over time, of the depreciable or amortizable assets of Topco LLC and its
flow-through subsidiaries at the time of each exchange;
•the
price of shares of our Class A common stock at the time of any future exchanges—the increases and
adjustments in our proportionate share of the existing tax basis of the assets of Topco LLC and its
flow-through subsidiaries that are directly related to the price of shares of our Class A common stock at
the time of future exchanges;
•the
extent to which such exchanges are taxable—if an exchange is not taxable for any reason, increased tax
deductions as a result of legacy IRC Section 754 election in place at Topco LLC will not be available to
generate payments under the TRA;
•the
amount and timing of our income—the TRA generally will require us to pay 85% of the tax benefits as
and when those benefits are treated as realized by us under the terms of the TRA. If we do not have taxable
income in a particular taxable year, we generally will not be required (absent a change of control or other
circumstances requiring an early termination payment) to make payments under the TRA for that taxable year
because no tax benefits will have been actually realized. Nevertheless, any tax benefits that do not result
in realized tax benefits in a given taxable year will likely generate tax attributes that may be utilized to
generate tax benefits in future (and possibly previous) taxable years. The utilization of any such tax
attributes will result in payments under the TRA; and
•applicable
tax rates—the tax rates in effect at the time a tax benefit is recognized.
The
payment obligations under the TRA are obligations of Maravai LifeSciences Holdings, Inc. and not of Topco
LLC. Although the actual timing and amount of any payments that may be made under the TRA will vary, we
expect that the aggregate payments that we will be required to make to MLSH 1 and MLSH 2 will be
substantial. Any payments made by us under the TRA will generally reduce the amount of overall cash flow
that might have otherwise been available to us or to Topco LLC and, to the extent that we are unable to make
payments under the TRA for any reason, the unpaid amounts will be deferred and will accrue interest until
paid by us. We anticipate funding ordinary course payments under the TRA from cash flow from operations of
Topco LLC and its subsidiaries, available cash and/or available borrowings under the Credit
Agreement.
Assuming
no material changes in the relevant tax law, and that we earn sufficient taxable income to realize all tax
benefits that are subject to the TRA, we expect that future payments under the Tax Receivable Agreement
relating to the purchase by us of LLC Units from MLSH 1 in connection with our prior offering and subsequent
exchanges and financing, to be approximately $718.2 million and to range over the next 14 years from
approximately $42.3 million to $63.3 million per year and decline thereafter. Future payments in respect of
subsequent exchanges or financing would be in addition to these amounts and are expected to be substantial.
The foregoing numbers are estimates and actual payments could differ materially. It is possible that future
transactions or events could increase or decrease the actual tax benefits realized and the corresponding TRA
payments. There may be a material negative effect on our liquidity if, as a result of timing discrepancies
or otherwise, the payments under the TRA exceed the actual benefits we realize in respect of the tax
attributes subject to the TRA and/or distributions to us by Topco LLC are not sufficient to permit us to
make payments under the TRA after we have paid taxes.
The
term of the TRA commenced upon the completion of our IPO and will continue until all such tax benefits have
been utilized or expire, unless we exercise our rights to terminate the agreements or payments under the
agreements are accelerated in the event we materially breach any of our material obligations under the
agreements.
Recognition
of Intangible Assets as Part of a Business Combination
For
acquisitions of businesses, we are required to record the assets acquired and liabilities assumed of
acquired businesses at their respective fair values at the date of acquisition. The purchase price, which
includes the fair value of consideration transferred, is attributed to the fair value of the assets acquired
and liabilities assumed. The excess of the purchase price of the acquisition over the fair value of the
identifiable net assets of the acquiree is recorded as goodwill.
Determining
the fair value of intangible assets acquired, defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between willing market participants, requires
management to use significant judgment, including the selection of valuation methodologies, assumptions
about future net cash flows, and discount rates. Each of these factors can significantly affect the value
attributed to the identifiable intangible asset acquired in a business combination.
We
typically use the discounted cash flow method under the income approach to estimate the fair value of
identifiable intangible assets acquired in a business combination. For the acquisition of MyChem, LLC, the
estimated fair value of the developed technology intangible asset was based on the multi-period excess
earnings method. The estimated fair value was developed by discounting future net cash flows to their
present value at market-based rates of return. We selected the assumptions used in the financial forecasts
using historical data, supplemented by current and anticipated market conditions, estimated revenue growth
rates, management’s plans, and guideline companies. Some of the more significant assumptions inherent
in estimating the fair value of this intangible asset included revenue growth rates ranging from 3.0% to
30.6%, technical obsolescent curves ranging from 5.0% to 7.5%, and a discount rate of 16.5%.
The
use of alternative estimates and assumptions could increase or decrease the estimated fair value and amounts
allocated to identifiable intangible assets acquired and future amortization expense as well as
goodwill.
Recent
Accounting Pronouncements
See
Note 1 to our consolidated financial statements for a discussion of recent accounting standards and
pronouncements.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
Interest
Rate Risk
As
of December 31, 2022, our primary exposure to interest rate risk was associated with our variable rate
long-term debt. Borrowings under our Credit Agreement bear interest at a rate equal to the Base Rate plus a
margin of 2.00%, with respect to each Base Rate-based loan, or the Term SOFR (Secured Overnight Financing
Rate) plus a margin of 3.00% with respect to each Term SOFR-based loan, subject in each case to an
applicable Base Rate or Term SOFR floor (see Note 9 to our consolidated financial statements). Interest
rates can fluctuate for a number of reasons, including changes in the fiscal and monetary policies or
geopolitical events or changes in general economic conditions. This could adversely affect our cash flows.
As
of December 31, 2022, we have an interest rate cap agreement in place to hedge a portion of our
variable interest rate risk on our outstanding long-term debt. The agreement has a contract notional amount
of $500.0 million and entitles us to receive from the counterparty at each calendar quarter end the
amount, if any, by which a specified floating market rate exceeds the cap strike interest rate. The floating
interest rate is reset at the end of each three-month period. The contract expires on January 19,
2025.
We
had $538.6 million of outstanding borrowings under our Tranche B Term Loan and no outstanding borrowings
under our Revolving Credit Facility as of December 31, 2022. For the year ended December 31, 2022,
the effect of a hypothetical 100 basis point increase or decrease in overall interest rates would have
changed our interest expense by approximately $5.5 million.
We
had cash of $632.1 million as of December 31, 2022. Our cash is held in demand deposits and is not
subject to market risk.
Foreign
Currency Risk
All
of our revenue is denominated in U.S. dollars. Although approximately 61.6% of our revenue for the year
ended December 31, 2022 was derived from international sales, primarily in Europe and Asia Pacific,
none of these sales are denominated in local currency. The majority of our expenses are generally
denominated in the currencies in which they are incurred, which is primarily in the United States. As we
expand our presence in international markets, to the extent we are required to enter into agreements
denominated in a currency other than the U.S. dollar, results of operations and cash flows may increasingly
be subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected
in the future due to changes in foreign currency exchange rates. To date, we have not entered into any
hedging arrangements with respect to foreign currency risk. As our international operations grow, we will
continue to reassess our approach to manage our risk relating to fluctuations in currency rates.
Item
8. Financial Statements and Supplementary Data
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Stockholders and the Board of Directors of Maravai LifeSciences Holdings, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Maravai LifeSciences Holdings, Inc. (the
Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive
income, changes in stockholders’ / member’s equity and cash flows for each of the three years in
the period ended December 31, 2022, and the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company at December 31, 2022
and 2021, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based
on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2023
expressed an unqualified opinion thereon.
Basis
for Opinion
These
financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks
of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our
opinion.
Critical
Audit Matter
The
critical audit matter communicated below is a matter arising from the current period audit of the financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates
to accounts or disclosures that are material to the financial statements and (2) involved our especially
challenging, subjective or complex judgments. The communication of the critical audit matter does not alter
in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate opinion on the critical audit matter or
on the accounts or disclosures to which it relates.
|
|
|
|
|
|
|
|
|
|
|
Payable
to related parties pursuant to a Tax Receivable Agreement
|
|
|
|
|
Description
of the Matter
|
|
As
discussed in Notes 1 and 14 of the December 31, 2022 consolidated financial statements,
the Company has recorded a $718.2 million payable to related parties pursuant to a Tax
Receivable Agreement (TRA). The TRA liability represents the amount the Company estimates to
pay to the counterparties to the TRA that are former owners of the Company who are related
parties (pre-IPO owners). The liability is computed as 85% of the estimated cash tax savings
to be received by the Company from utilizing the positive tax attributes contributed by
pre-IPO owners.
|
|
|
|
|
|
Auditing
management’s accounting for the TRA liability is complex because of the application of
the tax laws used to determine the tax basis upon which to calculate the corresponding TRA
liability. These factors involved subjective auditor judgment and audit effort in performing
procedures and evaluating the appropriateness of the calculation of the tax basis. In
addition, the audit effort involved the use of professionals with specialized skill and
knowledge to assist in performing these procedures and evaluating the audit evidence
obtained from these procedures.
|
|
|
|
|
How
We Addressed the Matter in Our Audit
|
|
Our
audit procedures included, among others, testing the information used in the calculation of
the TRA liability, and the involvement of professionals with specialized skills and
knowledge to assist in (i) developing an independent calculation of the tax basis, (ii)
comparing the independent calculation to management’s calculations to evaluate the
reasonableness of the tax basis, and (iii) assessing management’s application of the
tax laws.
|
/s/
Ernst & Young LLP
We
have served as the Company’s auditor since 2016.
San Mateo, California
February 28,
2023
MARAVAI
LIFESCIENCES HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, |
|
2022
|
|
2021
|
|
Assets
|
|
|
|
|
Current
assets: |
|
|
|
|
Cash
|
$
|
632,138
|
|
|
$
|
551,272
|
|
|
Accounts
receivable, net |
138,624
|
|
|
117,512
|
|
|
Inventory
|
43,152
|
|
|
51,557
|
|
|
Prepaid
expenses and other current assets |
25,798
|
|
|
19,698
|
|
|
Government
funding receivable |
8,190
|
|
|
—
|
|
|
Total
current assets |
847,902
|
|
|
740,039
|
|
|
Property
and equipment, net |
52,694
|
|
|
46,332
|
|
|
|
|
|
|
Goodwill
|
283,668
|
|
|
152,766
|
|
|
Intangible
assets, net |
216,663
|
|
|
117,571
|
|
|
Deferred
tax assets |
765,799
|
|
|
808,117
|
|
|
Other
assets |
115,589
|
|
|
53,451
|
|
|
Total
assets |
$
|
2,282,315
|
|
|
$
|
1,918,276
|
|
|
Liabilities
and stockholders’ equity |
|
|
|
|
Current
liabilities: |
|
|
|
|
Accounts
payable |
$
|
5,991
|
|
|
$
|
8,154
|
|
|
Accrued
expenses and other current liabilities |
53,371
|
|
|
34,574
|
|
|
Deferred
revenue |
3,088
|
|
|
10,211
|
|
|
|
|
|
|
Current
portion of payable to related parties pursuant to the Tax Receivable Agreement |
42,254
|
|
|
34,838
|
|
|
Current
portion of long-term debt |
5,440
|
|
|
6,000
|
|
|
Total
current liabilities |
110,144
|
|
|
93,777
|
|
|
Long-term
debt, less current portion |
521,997
|
|
|
524,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable
to related parties pursuant to the Tax Receivable Agreement, less current portion |
675,956
|
|
|
713,481
|
|
|
Other
long-term liabilities |
68,975
|
|
|
41,066
|
|
|
Total
liabilities |
1,377,072
|
|
|
1,372,915
|
|
|
Commitments
and contingencies (Note 8)
|
|
|
|
|
Stockholders’
equity: |
|
|
|
|
Class
A common stock, $
0.01
par value -
500,000
shares authorized;
131,692
and
131,488
shares issued and outstanding as of December 31, 2022 and 2021,
respectively
|
1,317
|
|
|
1,315
|
|
|
Class
B common stock, $
0.01
par value -
300,000
shares authorized;
123,669
shares issued and outstanding as of December 31, 2022 and 2021
|
1,237
|
|
|
1,237
|
|
|
Additional
paid-in capital |
137,898
|
|
|
128,386
|
|
|
Retained
earnings |
404,766
|
|
|
184,561
|
|
|
|
|
|
|
Total
stockholders’ equity attributable to Maravai LifeSciences Holdings, Inc. |
545,218
|
|
|
315,499
|
|
|
Non-controlling
interest |
360,025
|
|
|
229,862
|
|
|
Total
stockholders’ equity |
905,243
|
|
|
545,361
|
|
|
Total
liabilities and stockholders’ equity |
$
|
2,282,315
|
|
|
$
|
1,918,276
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
MARAVAI
LIFESCIENCES HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF INCOME
(in
thousands, except per share and per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31, |
|
2022
|
|
2021
|
|
2020
|
|
Revenue
|
$
|
883,001
|
|
|
$
|
799,240
|
|
|
$
|
284,098
|
|
|
Operating
expenses: |
|
|
|
|
|
|
Cost
of revenue |
168,957
|
|
|
140,561
|
|
|
79,649
|
|
|
Selling,
general and administrative |
129,259
|
|
|
100,064
|
|
|
94,245
|
|
|
Research
and development |
18,369
|
|
|
15,219
|
|
|
9,304
|
|
|
Change
in estimated fair value of contingent consideration |
(
7,800) |
|
|
—
|
|
|
—
|
|
|
Gain
on sale of business |
—
|
|
|
(
11,249) |
|
|
—
|
|
|
Gain
on sale and leaseback transaction |
—
|
|
|
—
|
|
|
(
19,002) |
|
|
Total
operating expenses |
308,785
|
|
|
244,595
|
|
|
164,196
|
|
|
Income
from operations |
574,216
|
|
|
554,645
|
|
|
119,902
|
|
|
Other
income (expense): |
|
|
|
|
|
|
Interest
expense |
(
20,414) |
|
|
(
30,260) |
|
|
(
30,740) |
|
|
Interest
income |
2,338
|
|
|
—
|
|
|
—
|
|
|
Loss
on extinguishment of debt |
(
208) |
|
|
—
|
|
|
(
7,592) |
|
|
Change
in payable to related parties pursuant to the Tax Receivable Agreement |
(
4,102) |
|
|
6,101
|
|
|
—
|
|
|
Other
(expense) income |
(
358) |
|
|
279
|
|
|
126
|
|
|
Income
before income taxes |
551,472
|
|
|
530,765
|
|
|
81,696
|
|
|
Income
tax expense |
60,809
|
|
|
61,515
|
|
|
2,880
|
|
|
Net
income |
490,663
|
|
|
469,250
|
|
|
78,816
|
|
|
Net
income (loss) attributable to non-controlling interests |
270,458
|
|
|
287,213
|
|
|
(
10,156) |
|
|
Net
income attributable to Maravai LifeSciences Holdings, Inc. |
$
|
220,205
|
|
|
$
|
182,037
|
|
|
$
|
88,972
|
|
|
|
|
|
|
|
|
Net
income per Class A common share/unit attributable to Maravai LifeSciences Holdings, Inc.:
|
|
|
|
|
|
|
Basic
|
$
|
1.67
|
|
|
$
|
1.59
|
|
|
$
|
7.43
|
|
|
Diluted
|
$
|
1.67
|
|
|
$
|
1.56
|
|
|
$
|
2.36
|
|
|
|
|
|
|
|
|
Weighted
average number of Class A common shares/units outstanding: |
|
|
|
|
|
|
Basic
|
131,545
|
|
|
114,791
|
|
|
10,351
|
|
|
Diluted
|
255,323
|
|
|
257,803
|
|
|
28,908
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
MARAVAI
LIFESCIENCES HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31, |
|
2022
|
|
2021
|
|
2020
|
|
Net
income |
$
|
490,663
|
|
|
$
|
469,250
|
|
|
$
|
78,816
|
|
|
Other
comprehensive income: |
|
|
|
|
|
|
Foreign
currency translation adjustments |
—
|
|
|
55
|
|
|
(
44) |
|
|
Total
other comprehensive income |
490,663
|
|
|
469,305
|
|
|
78,772
|
|
|
Comprehensive
income attributable to non-controlling interests |
270,458
|
|
|
287,224
|
|
|
(
10,156) |
|
|
Total
comprehensive income attributable to Maravai LifeSciences Holdings, Inc. |
$
|
220,205
|
|
|
$
|
182,081
|
|
|
$
|
88,928
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
MARAVAI
LIFESCIENCES HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’/MEMBER’S EQUITY
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Common Stock |
|
Class
B Common Stock |
|
|
|
|
|
|
|
|
|
|
|
Member’s
Equity |
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Additional
Paid-In Capital |
|
Retained
Earnings |
|
Accumulated
Other Comprehensive Income (Loss) |
|
Non-controlling
Interest |
|
Total
Stockholders’/Member’s Equity |
|
December
31, 2019 |
$
|
141,529
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(
133) |
|
|
$
|
3,231
|
|
|
$
|
144,627
|
|
|
Activity
prior to initial public offering ("IPO") and related Organizational Transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
of MLSC Holdings, LLC ("MLSC") incentive units |
(
9,140) |
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(
9,140) |
|
|
Distributions
to non-controlling interests holders |
(
88,880) |
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(
88,880) |
|
|
Unit-based
compensation |
1,793
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,483
|
|
|
3,276
|
|
|
Net
income |
88,118
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
98
|
|
|
88,216
|
|
|
Purchase
of non-controlling interests in MLSC |
(
161,615) |
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(
4,812) |
|
|
(
166,427) |
|
|
Foreign
currency translation adjustment |
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(
1) |
|
|
—
|
|
|
(
1) |
|
|
Effects
of the IPO and related Organizational Transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects
of Organizational Transactions |
28,195
|
|
|
28,966
|
|
289
|
|
|
160,974
|
|
1,610
|
|
|
(
200,390) |
|
|
—
|
|
|
114
|
|
|
10,236
|
|
|
(
159,946) |
|
|
Issuance
of Class A common stock in connection with the IPO, net of issuance costs of $
108,571
|
—
|
|
|
69,000
|
|
690
|
|
|
—
|
|
—
|
|
|
1,753,742
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,754,432
|
|
|
Acquisition
of preexisting LLC Units from MLSH 1 |
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
(
1,421,760) |
|
|
—
|
|
|
(
29) |
|
|
(
2,538) |
|
|
(
1,424,327) |
|
|
Non-controlling
interest adjustment for purchase of LLC Units from Topco LLC with proceeds from IPO |
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
(
58,940) |
|
|
—
|
|
|
(
1) |
|
|
58,941
|
|
|
—
|
|
|
Repurchase
and retirement of Class A common from MLSH 2 |
—
|
|
|
(
1,319) |
|
(
13) |
|
|
—
|
|
—
|
|
|
(
33,645) |
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(
33,658) |
|
|
Equity-based
compensation |
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
2,980
|
|
|
—
|
|
|
—
|
|
|
17,407
|
|
|
20,387
|
|
|
Net
loss |
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
(
3,044) |
|
|
—
|
|
|
(
17,787) |
|
|
(
20,831) |
|
|
Recognition
of impact of entering into Tax Receivable Agreement |
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
42,776
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
42,776
|
|
|
Activity
subsequent to the initial public offering and related Organizational Transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-based
compensation |
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
362
|
|
|
—
|
|
|
—
|
|
|
604
|
|
|
966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Common Stock |
|
Class
B Common Stock |
|
|
|
|
|
|
|
|
|
|
|
Member’s
Equity |
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Additional
Paid-In Capital |
|
Retained
Earnings |
|
Accumulated
Other Comprehensive Income (Loss) |
|
Non-controlling
Interest |
|
Total
Stockholders’/Member’s Equity |
|
Net
income |
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
3,898
|
|
|
—
|
|
|
7,533
|
|
|
11,431
|
|
|
Foreign
currency translation adjustment |
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
6
|
|
|
10
|
|
|
16
|
|
|
Tax
distribution to non-controlling interest holder |
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
(
8,171) |
|
|
(
8,171) |
|
|
December
31, 2020 |
—
|
|
|
96,647
|
|
966
|
|
|
160,974
|
|
1,610
|
|
|
85,125
|
|
|
854
|
|
|
(
44) |
|
|
66,235
|
|
|
154,746
|
|
|
Cumulative
effect of adoption of ASC 842, net of tax |
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,670
|
|
|
—
|
|
|
2,784
|
|
|
4,454
|
|
|
Effect
of exchanges of LLC Units |
—
|
|
|
34,734
|
|
348
|
|
|
(
34,734) |
|
|
(
348) |
|
|
31,003
|
|
|
—
|
|
|
—
|
|
|
(
31,003) |
|
|
—
|
|
|
Recognition
of impact of Tax Receivable Agreement due to exchanges of LLC Units |
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
53,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
53,000
|
|
|
Issuance
of Class A common stock under employee equity plans, net of shares withheld for employee
taxes |
—
|
|
|
107
|
|
1
|
|
|
—
|
|
—
|
|
|
1,669
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,670
|
|
|
Impact
of cash contribution to Topco LLC, exchange and forfeiture of LLC Units, and forfeiture of Class
B common stock by MLSH 1 |
—
|
|
|
—
|
|
—
|
|
|
(
2,571) |
|
|
(
25) |
|
|
(
46,206) |
|
|
—
|
|
|
—
|
|
|
51,451
|
|
|
5,220
|
|
|
Non-controlling
interest adjustment for changes in proportionate ownership in Topco LLC |
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
(
809) |
|
|
—
|
|
|
—
|
|
|
809
|
|
|
—
|
|
|
Stock-based
compensation |
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
4,645
|
|
|
—
|
|
|
—
|
|
|
5,813
|
|
|
10,458
|
|
|
Distribution
for tax liabilities to non-controlling interest holder |
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
(
41) |
|
|
—
|
|
|
—
|
|
|
(
153,451) |
|
|
(
153,492) |
|
|
Net
income |
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
182,037
|
|
|
—
|
|
|
287,213
|
|
|
469,250
|
|
|
Foreign
currency translation adjustment |
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
44
|
|
|
11
|
|
|
55
|
|
|
December
31, 2021 |
—
|
|
|
131,488
|
|
1,315
|
|
|
123,669
|
|
1,237
|
|
|
128,386
|
|
|
184,561
|
|
|
—
|
|
|
229,862
|
|
|
545,361
|
|
|
Issuance
of Class A common stock under employee equity plans, net of shares withheld for employee
taxes |
—
|
|
|
204
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2,303
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,305
|
|
|
Non-controlling
interest adjustment for changes in proportionate ownership in Topco LLC |
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(
864) |
|
|
—
|
|
|
—
|
|
|
864
|
|
|
—
|
|
|
Stock-based
compensation |
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,623
|
|
|
—
|
|
|
—
|
|
|
9,047
|
|
|
18,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Common Stock |
|
Class
B Common Stock |
|
|
|
|
|
|
|
|
|
|
|
Member’s
Equity |
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Additional
Paid-In Capital |
|
Retained
Earnings |
|
Accumulated
Other Comprehensive Income (Loss) |
|
Non-controlling
Interest |
|
Total
Stockholders’/Member’s Equity |
|
Distribution
for tax liabilities to non-controlling interest holder |
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
141
|
|
|
—
|
|
|
—
|
|
|
(
150,206) |
|
|
(
150,065) |
|
|
Impact
of change to deferred tax asset associated with cash contribution to Topco LLC |
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(
1,691) |
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(
1,691) |
|
|
Net
income |
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
220,205
|
|
|
—
|
|
|
270,458
|
|
|
490,663
|
|
|
December
31, 2022 |
$
|
—
|
|
|
131,692
|
|
$
|
1,317
|
|
|
123,669
|
|
$
|
1,237
|
|
|
$
|
137,898
|
|
|
$
|
404,766
|
|
|
$
|
—
|
|
|
$
|
360,025
|
|
|
$
|
905,243
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
MARAVAI
LIFESCIENCES HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31, |
|
2022
|
|
2021
|
|
2020
|
|
Operating
activities: |
|
|
|
|
|
|
Net
income |
$
|
490,663
|
|
|
$
|
469,250
|
|
|
$
|
78,816
|
|
|
Adjustments
to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation
|
7,566
|
|
|
6,413
|
|
|
5,517
|
|
|
Amortization
of intangible assets |
24,269
|
|
|
18,339
|
|
|
20,320
|
|
|
Amortization
of right-of-use assets |
6,268
|
|
|
8,792
|
|
|
—
|
|
|
Amortization
of deferred financing costs |
2,788
|
|
|
2,676
|
|
|
1,825
|
|
|
Equity-based
compensation expense |
18,670
|
|
|
10,458
|
|
|
24,629
|
|
|
Loss
on extinguishment of debt |
208
|
|
|
—
|
|
|
7,592
|
|
|
Deferred
income taxes |
42,318
|
|
|
46,904
|
|
|
(
5,464) |
|
|
Change
in estimated fair value of contingent consideration |
(
7,800) |
|
|
—
|
|
|
—
|
|
|
Gain
on sale of business |
—
|
|
|
(
11,249) |
|
|
—
|
|
|
Gain
on sale and leaseback transaction |
—
|
|
|
—
|
|
|
(
19,002) |
|
|
Acquired
and in-process research and development costs |
—
|
|
|
—
|
|
|
2,881
|
|
|
|
|
|
|
|
|
Financing
costs incurred for line of credit |
—
|
|
|
—
|
|
|
(
3,239) |
|
|
Revaluation
of liabilities under the Tax Receivable Agreement |
4,102
|
|
|
(
6,101) |
|
|
—
|
|
|
Other
|
(
7,993) |
|
|
(
281) |
|
|
2,419
|
|
|
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
Accounts
receivable |
(
22,272) |
|
|
(
70,391) |
|
|
(
33,144) |
|
|
Inventory
|
9,459
|
|
|
(
21,574) |
|
|
(
19,099) |
|
|
Prepaid
expenses and other assets |
(
52,873) |
|
|
(
9,513) |
|
|
(
5,518) |
|
|
Government
funding receivable |
16,973
|
|
|
—
|
|
|
—
|
|
|
Accounts
payable |
(
1,578) |
|
|
676
|
|
|
1,176
|
|
|
Accrued
expenses and other current liabilities |
8,503
|
|
|
(
3,457) |
|
|
17,777
|
|
|
Deferred
revenue |
(
7,123) |
|
|
(
67,851) |
|
|
77,220
|
|
|
Other
long-term liabilities |
3,829
|
|
|
(
4,521) |
|
|
(
2,519) |
|
|
Net
cash provided by operating activities |
535,977
|
|
|
368,570
|
|
|
152,187
|
|
|
Investing
activities: |
|
|
|
|
|
|
Cash
paid for acquisition, net of cash acquired |
(
238,969) |
|
|
—
|
|
|
(
3,024) |
|
|
Purchases
of property and equipment |
(
17,090) |
|
|
(
14,850) |
|
|
(
25,408) |
|
|
Proceeds
from government assistance allocated to property and equipment
|
1,105
|
|
|
—
|
|
|
—
|
|
|
Prepaid
lease payments on finance lease yet to commence |
(
13,278) |
|
|
—
|
|
|
—
|
|
|
Proceeds
from sale of building |
—
|
|
|
548
|
|
|
34,500
|
|
|
Proceeds
from sale of business, net of cash divested |
620
|
|
|
119,957
|
|
|
—
|
|
|
Net
cash (used in) provided by investing activities |
(
267,612) |
|
|
105,655
|
|
|
6,068
|
|
|
Financing
activities: |
|
|
|
|
|
|
Distributions
to non-controlling interests holders |
(
150,206) |
|
|
(
153,451) |
|
|
(
97,051) |
|
|
Proceeds
from borrowings of long-term debt, net of discount |
8,455
|
|
|
—
|
|
|
609,000
|
|
|
Financing
costs incurred for long-term debt |
—
|
|
|
—
|
|
|
(
9,295) |
|
|
Repurchase
of incentive units |
—
|
|
|
—
|
|
|
(
9,140) |
|
|
Principal
repayments of long-term debt |
(
13,895) |
|
|
(
6,000) |
|
|
(
411,875) |
|
|
Payment
of contingent consideration |
—
|
|
|
—
|
|
|
(
1,439) |
|
|
Payments
made on facility financing lease obligation and capital lease |
—
|
|
|
—
|
|
|
(
201) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31, |
|
2022
|
|
2021
|
|
2020
|
|
Payments
to MLSH 1 pursuant to the Tax Receivable Agreement |
(
29,108) |
|
|
(
1,115) |
|
|
—
|
|
|
Payments
to MLSH 2 pursuant to the Tax Receivable Agreement |
(
5,103) |
|
|
(
192) |
|
|
—
|
|
|
Payment
for non-controlling interests in MLSC |
—
|
|
|
—
|
|
|
(
120,005) |
|
|
Payment
to MLSH 2 for Blocker Mergers |
—
|
|
|
—
|
|
|
(
208,053) |
|
|
Proceeds
from issuance of Class A common stock sold in IPO, net of offering costs |
—
|
|
|
—
|
|
|
1,757,245
|
|
|
Proceeds
from issuance of Class B common stock sold to MLSH 1 |
—
|
|
|
—
|
|
|
1,687
|
|
|
Purchase
of LLC Units from MLSH 1 |
—
|
|
|
—
|
|
|
(
1,424,324) |
|
|
Repurchase
of Class A common stock from MLSH 2 |
—
|
|
|
—
|
|
|
(
33,658) |
|
|
Proceeds
from issuance of Class A common stock under employee equity plans, net of shares withheld for
employee taxes |
2,358
|
|
|
1,709
|
|
|
321
|
|
|
Net
cash (used in) provided by financing activities |
(
187,499) |
|
|
(
159,049) |
|
|
53,212
|
|
|
Effects
of exchange rate changes on cash |
—
|
|
|
(
88) |
|
|
17
|
|
|
Net
increase in cash |
80,866
|
|
|
315,088
|
|
|
211,484
|
|
|
Cash,
beginning of period |
551,272
|
|
|
236,184
|
|
|
24,700
|
|
|
Cash,
end of period |
$
|
632,138
|
|
|
$
|
551,272
|
|
|
$
|
236,184
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information: |
|
|
|
|
|
|
Cash
paid for interest |
$
|
20,198
|
|
|
$
|
27,234
|
|
|
$
|
28,916
|
|
|
Cash
paid for income taxes |
$
|
23,032
|
|
|
$
|
22,473
|
|
|
$
|
5,006
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of non-cash activities: |
|
|
|
|
|
|
Property
and equipment included in accounts payable and accrued expenses |
$
|
1,701
|
|
|
$
|
2,149
|
|
|
$
|
1,990
|
|
|
|
|
|
|
|
|
Financing
cost deducted from long-term debt proceeds |
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,000
|
|
|
Right-of-use
assets obtained in exchange for new operating lease liabilities |
$
|
17,513
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Building
and improvements capitalized under lease financing transaction |
$
|
—
|
|
|
$
|
—
|
|
|
$
|
700
|
|
|
Fair
value of contingent consideration liability recorded in connection with acquisition of a
business |
$
|
7,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Accrued
consideration payable for MyChem acquisition |
$
|
10,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Exchange
of units for MLSC non-controlling interests |
$
|
—
|
|
|
$
|
—
|
|
|
$
|
46,422
|
|
|
Exchange
of Class A common stock for the Blocker Mergers |
$
|
—
|
|
|
$
|
—
|
|
|
$
|
782,073
|
|
|
Recognition
of deferred tax assets from Organizational Transactions, subsequent exchanges and cash
contribution |
$
|
—
|
|
|
$
|
423,361
|
|
|
$
|
441,984
|
|
|
Recognition
of liabilities under the Tax Receivable Agreement |
$
|
—
|
|
|
$
|
366,179
|
|
|
$
|
389,546
|
|
|
IPO
issuance costs included in accounts payable and accrued expenses |
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,816
|
|
|
Receivable
from lessor funded financing |
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,987
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
MARAVAI
LIFESCIENCES HOLDINGS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Significant Accounting
Policies
Description
of Business
Maravai
LifeSciences Holdings, Inc. (the “Company”, and together with its consolidated subsidiaries,
“Maravai”, “we”, “us”, and “our”) provides critical
products to enable the development of drugs, therapeutics, diagnostics, vaccines and support research on
human diseases. Our products address the key phases of biopharmaceutical development and include complex
nucleic acids for diagnostic and therapeutic applications and antibody-based products to detect
impurities during the production of biopharmaceutical products.
The
Company is headquartered in San Diego, California and has historically operated in
three principal businesses: Nucleic Acid Production, Biologics Safety Testing and
Protein Detection. In September 2021, the Company completed the divestiture of its Protein Detection
business (see Note 2). Our Nucleic Acid Production business manufactures and sells products used in the
fields of gene therapy, vaccines, nucleoside chemistry, oligonucleotide therapy and molecular
diagnostics, including reagents used in the chemical synthesis, modification, labelling and purification
of deoxyribonucleic acid (“DNA”) and ribonucleic acid (“RNA”). Our core Nucleic
Acid Production offerings include messenger ribonucleic acid (“mRNA”), long and short
oligonucleotides, our proprietary CleanCap® capping technology and oligonucleotide building blocks.
Our Biologics Safety Testing business sells highly specialized analytical products for use in biologic
manufacturing process development, including custom product-specific development antibody and assay
development services. Our Protein Detection business sold innovative labeling and detection reagents for
researchers in immunohistochemistry.
Organization
We
were incorporated as a Delaware corporation in August 2020 for the purpose of facilitating an initial
public offering (“IPO”). Immediately prior to the IPO, we effected a series of
organizational transactions (the “Organizational Transactions”) as discussed in Note 10,
which, together with the IPO, were completed in November 2020, that resulted in the Company operating,
controlling all of the business affairs and becoming the ultimate parent company of Maravai Topco
Holdings, LLC (“Topco LLC”) and its consolidated subsidiaries. Maravai Life Sciences
Holdings, LLC (“MLSH 1”), which is controlled by investment entities affiliated with GTCR,
LLC (“GTCR”), is the only other member of Topco LLC.
The
Company is the sole managing member of Topco LLC, which operates and controls TriLink Biotechnologies,
LLC (“TriLink”), Glen Research, LLC, MockV Solutions, LLC and Cygnus Technologies, LLC
(“Cygnus”) and their respective subsidiaries. Prior to the Company’s divestiture of
its Protein Detection business in September 2021, Topco LLC also operated and controlled Vector
Laboratories, Inc. and its subsidiaries (“Vector”).
Basis
of Presentation
The
Company operates and controls all of the business and affairs of Topco LLC, and, through Topco LLC
and its subsidiaries, conducts its business. Because we manage and operate the business and control
the strategic decisions and day-to-day operations of Topco LLC and also have a substantial financial
interest in Topco LLC, we consolidate the financial results of Topco LLC, and a portion of our net
income is allocated to the non-controlling interests in Topco LLC held by MLSH 1.
The
Organizational Transactions were considered transactions between entities under common control. As a
result, the consolidated financial statements for periods prior to the IPO have been adjusted to
combine the previously separate entities for presentation purposes.
The
accompanying consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America ("U.S. GAAP") pursuant to the rules
and regulations of the Securities and Exchange Commission (“SEC”) and include our
accounts and the accounts of our subsidiaries.
All
intercompany transactions and accounts between the businesses comprising the Company have been
eliminated in the accompanying consolidated financial statements.
Variable
Interest Entities
The
Company consolidates all entities that it controls through a majority voting interest or as the
primary beneficiary of a variable interest entity (“VIE”). In determining whether the
Company is the primary beneficiary of an entity, the Company applies a qualitative approach that
determines whether it has both (i) the power to direct the economically significant activities
of the entity and (ii) the obligation to absorb
losses of, or the right to receive benefits from, the entity that could potentially be significant
to that entity. The Company’s determination about whether it should consolidate such VIEs is
made continuously as changes to existing relationships or future transactions may result in a
consolidation event.
Use
of Estimates
The
preparation of consolidated financial statements in accordance with GAAP requires the Company to
make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities,
equity, revenue and expenses, and related disclosures. These estimates form the basis for judgments
the Company makes about the carrying values of assets and liabilities that are not readily apparent
from other sources. The Company bases its estimates and judgments on historical experience and on
various other assumptions that the Company believes are reasonable under the circumstances. These
estimates are based on management’s knowledge about current events and expectations about
actions the Company may undertake in the future. Significant estimates include, but are not limited
to, the measurement of right-of-use assets and lease liabilities and related incremental borrowing
rate, the payable to related parties pursuant to the Tax Receivable Agreement (as defined in Note
14), the realizability of our net deferred tax assets, and valuation of goodwill and intangible
assets acquired in business combinations. Actual results could differ materially from those
estimates.
Revenue
Recognition
The
Company generates revenue primarily from the sale of products, and to a much lesser extent, services
in the fields of nucleic acid production, biologics safety testing, and protein detection.
Revenue
is recognized when control of promised goods or services is transferred to a customer in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services. To determine revenue recognition for its arrangements with customers, the Company
performs the following five steps: (i) identify the contract(s) with a customer;
(ii) identify the performance obligations in the contract; (iii) determine the transaction
price; (iv) allocate the transaction price to the performance obligations in the contract; and
(v) recognize revenue when (or as) the entity satisfies a performance obligation. The majority
of the Company’s contracts include only one performance obligation. A performance obligation
is a promise in a contract to transfer a distinct good or service to the customer and is defined as
the unit of account for revenue recognition. The Company also recognizes revenue from other
contracts that may include a combination of products and services, the provision of solely services,
or from license fee arrangements which may be associated with the delivery of product. Where there
is a combination of products and services, the Company accounts for the promises as individual
performance obligations if they are concluded to be distinct. Performance obligations are considered
distinct if they are both capable of being distinct and distinct within the context of the contract.
In determining whether performance obligations meet the criteria for being distinct, the Company
considers a number of factors, such as the degree of interrelation and interdependence between
obligations, and whether or not the good or service significantly modifies or transforms another
good or service in the contract. As a practical expedient, we do not adjust the transaction price
for the effects of a significant financing component if, at contract inception, the period between
customer payment and the transfer of goods or services is expected to be one year or less. Contracts
with customers are evaluated on a contract-by-contract basis as contracts may include multiple types
of goods and services as described below.
Nucleic
Acid Production
Nucleic
Acid Production revenue is generated from the manufacture and sale of highly modified, complex
nucleic acids products to support the needs of our of customers’ research, therapeutic and
vaccine programs. The primary offering of products includes CleanCap, mRNA, and specialized
oligonucleotides. Contracts typically consist of a single performance obligation. We also sell
nucleic acid products for labeling and detecting proteins in cells and tissue samples research. The
Company recognizes revenue from these products in the period in which the performance obligation is
satisfied by transferring control to the customer. Revenue for nucleic acid catalog products is
recognized at a single point in time, generally upon shipment to the customer. Revenue for contracts
for certain custom nucleic acid products, with an enforceable right to payment and a reasonable
margin for work performed to date, is recognized over time, based on a cost-to-cost input method
over the manufacturing period. Payments received from customers in advance of manufacturing their
products is recorded as deferred revenue until the products were delivered.
Biologics
Safety Testing
The
Company’s Biologics Safety Testing revenue is associated with the sale of bioprocess impurity
detection kit products. We also enter into contracts that include custom antibody development, assay
development and antibody affinity extraction services. These products and services enable the
detection of impurities that occur in the manufacturing of biologic drugs and other therapeutics.
The Company recognizes revenue from the sale of bioprocess impurity detection kits in the period in
which the performance obligation is satisfied by transferring control to the
customer.
Custom antibody development contracts consist of a single performance obligation, typically with an
enforceable right to payment and a reasonable margin for work performed to date. Revenue is
recognized over time based on a cost-to-cost input method over the contract term. Where an
enforceable right to payment does not exist, revenue is recognized at a point in time when control
is transferred to the customer. Assay development service contracts consist of a single performance
obligation, revenue is recognized at a point in time when a successful antigen test and report is
provided to the customer. Affinity extraction services, which generally occur over a short period of
time, consist of a single performance obligation to perform the extraction service and provide a
summary report to the customer. Revenue is recognized either over time or at a point in time
depending on contractual payment terms with the customer.
The
Company elected the practical expedient to not disclose the unfulfilled performance
obligations for contracts with an original length of one year or less. The Company
had no material unfulfilled performance obligations for contracts with an original length greater
than one year for any period presented.
The
Company accepts returns only if the products do not meet customer specifications and historically,
the Company’s volume of product returns has not been significant. Further, no warranties are
provided for promised goods and services other than assurance type warranties.
Revenue
for an individual contract is recognized at the related transaction price, which is the amount the
Company expects to be entitled to in exchange for transferring the products and/or services. The
transaction price for product sales is calculated at the contracted product selling price. The
transaction price for a contract with multiple performance obligations is allocated to the separate
performance obligations on a relative standalone selling price basis. Standalone selling prices for
products are determined based on the prices charged to customers, which are directly observable.
Standalone selling price of services are mostly based on time and materials. Generally, payments
from customers are due when goods and services are transferred. As most contracts contain a single
performance obligation, the transaction price is representative of the standalone selling price
charged to customers. Revenue is recognized only to the extent that it is probable that a
significant reversal of the cumulative amount recognized will not occur in future periods. Variable
consideration has not been material to our consolidated financial statements.
Sales
taxes
Sales
taxes collected by the Company are not included in the transaction price as revenue as they are
ultimately remitted to a governmental authority.
Shipping
and handling costs
The
Company has elected to account for shipping and handling activities related to contracts with
customers as costs to fulfill the promise to transfer the associated products. Accordingly, revenue
for shipping and handling is recognized at the same time that the related product revenue is
recognized.
Contract
costs
The
Company recognizes the incremental costs of obtaining contracts as an expense when incurred when the
amortization period of the assets that otherwise would have been recognized is one year or less.
These costs are included in sales and marketing and general and administrative expenses. The costs
to fulfill the contracts are determined to be immaterial and are recognized as an expense when
incurred.
Contract
balances
Contract
assets are generated when contractual billing schedules differ from revenue recognition timing and
the Company records contract receivable when it has an unconditional right to consideration. There
were
no
contract asset balances as of December 31, 2022 or 2021.
Contract liabilities include billings in excess of revenue recognized, such as customer deposits and
deferred revenue. Customer deposits, which are included in accrued expenses, are recorded when cash
payments are received or due in advance of performance. Deferred revenue is recorded when the
Company has unsatisfied performance obligations. Total contract liabilities were $
4.8 million and $
12.6 million as of December 31, 2022 and 2021, respectively. Contract
liabilities are expected to be recognized into revenue within the next twelve months.
Disaggregation
of Revenue
The
following tables summarize the revenue by segment and region for the periods presented (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2022 |
|
Nucleic Acid
Production |
|
Biologics
Safety Testing |
|
Total
|
| North
America |
$
|
312,119
|
|
$
|
27,354
|
|
$
|
339,473
|
| Europe,
the Middle East and Africa |
415,298
|
|
17,628
|
|
432,926
|
| Asia
Pacific |
85,508
|
|
24,286
|
|
109,794
|
| Latin
and Central America |
144
|
|
664
|
|
808
|
|
Total
revenue |
$
|
813,069
|
|
$
|
69,932
|
|
$
|
883,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2021 |
|
Nucleic Acid
Production |
|
Biologics
Safety Testing |
|
Protein
Detection |
|
Total
|
| North
America |
$
|
280,369
|
|
$
|
25,686
|
|
$
|
11,016
|
|
$
|
317,071
|
| Europe,
the Middle East and Africa |
377,325
|
|
15,597
|
|
4,752
|
|
397,674
|
| Asia
Pacific |
54,114
|
|
26,471
|
|
3,068
|
|
83,653
|
| Latin
and Central America |
56
|
|
663
|
|
123
|
|
842
|
|
Total
revenue |
$
|
711,864
|
|
$
|
68,417
|
|
$
|
18,959
|
|
$
|
799,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2020 |
|
Nucleic Acid
Production |
|
Biologics
Safety Testing |
|
Protein
Detection |
|
Total
|
| North
America |
$
|
115,216
|
|
$
|
21,787
|
|
$
|
13,343
|
|
$
|
150,346
|
| Europe,
the Middle East and Africa |
69,637
|
|
14,862
|
|
5,606
|
|
90,105
|
| Asia
Pacific |
21,444
|
|
17,946
|
|
3,783
|
|
43,173
|
| Latin
and Central America |
23
|
|
302
|
|
149
|
|
474
|
|
Total
revenue |
$
|
206,320
|
|
$
|
54,897
|
|
$
|
22,881
|
|
$
|
284,098
|
Total
revenue is attributed to geographic regions based on the bill-to location of the transaction. For all
periods presented, the majority of our revenue was recognized at a point in time.
Shipping and Handling Costs
Shipping and handling costs, which are charged to customers, are included in revenue. Shipping and
handling charges included in revenue were approximately $
3.2 million, $
3.6 million and $
3.3 million for the years ended December 31, 2022, 2021 and 2020,
respectively. Freight and supplies costs
directly associated with shipping products to customers are included as a component of cost of
revenue.
Research
and Development
Research
and development (“R&D”) expenses include personnel costs, including salaries,
benefits and equity-based compensation for laboratory personnel, outside contracted services, and
costs of supplies. R&D costs are expensed as incurred. Payments made prior to the receipt of
goods or services to be used in R&D are recognized as prepaid assets until the goods are
received or services are rendered.
Advertising Costs
The Company expenses advertising costs as
incurred. Advertising costs incurred were approximately $
2.5 million, $
1.3 million and $
1.2 million during the years ended December 31, 2022, 2021 and 2020,
respectively.
Equity-Based
Compensation
Stock-Based
Compensation
The
Company recognized stock-based compensation for all equity awards made to employees based upon the
awards’ estimated grant date fair value. For equity awards that vest subject to the
satisfaction of service requirements, compensation expense is measured based on the fair value of
the award on the date of grant and expense is recognized on a straight-line basis over the requisite
service period, which is typically between two
to
four years. We account for forfeitures as they occur. Stock-based compensation
is classified in the accompanying consolidated statements of income based on the function to which
the related services are provided.
The
Company estimates the fair value of stock option grants using the Black-Scholes option pricing
model. The assumptions used in estimating the fair value of these awards, such as expected term,
expected dividend yield, volatility and risk-free interest rate, represent management’s best
estimates and involve inherent uncertainties and the application of management’s judgment. If
actual results are not consistent with the Company’s assumptions and judgments used in making
these estimates, the Company may be required to increase or decrease compensation expense, which
could be material to the Company’s consolidated results of operations.
The
fair value of restricted stock units (“RSUs”) is determined based on the number of
shares granted and the quoted market price of the Company’s Class A common stock on the date
of grant.
For
performance stock units (“PSUs”) which are subject to service and market conditions,
compensation expense is measured based on the fair value of the award on the date of grant and
expense is recognized on a straight-line basis over the requisite service period regardless if the
market condition is satisfied. If the grantee is terminated prior to meeting both conditions, any
previously recognized expense is reversed. The Company estimates the fair value of PSUs using the
Monte Carlo simulation model. The assumptions used in estimating the fair value of these awards,
such as expected term, volatility and risk-free interest rate, represent management’s best
estimates and involve inherent uncertainties and the application of management’s
judgment.
Unit-Based
Compensation
Up
until the IPO, MLSH 1 had granted unit-based awards to certain executives of Topco LLC who are also
executives of the Company in the form of non-vested units. Topco LLC’s controlled subsidiary,
MLSC, also granted unit-based awards only to certain employees of its subsidiaries (collectively,
the “Incentive Units”). All awards of Incentive Units were measured based on the fair
value of the award on the date of grant. The Company recognizes compensation expense for MLSH 1
awards in its consolidated financial statements as MLSH 1 is considered to be the economic interest
holder in Topco LLC. Compensation expense for the Incentive Units is recognized over their requisite
service period. Forfeitures are recognized when they occur.
The
grant date fair value of Incentive Unit awards was determined by the Company’s Board of
Directors with the assistance of management and an independent third-party valuation
specialist.
Income
Taxes
We
are subject to U.S. federal and state income taxes. We are the controlling member of Topco LLC,
which has been, and will continue to be, treated as a partnership for U.S. federal and state income
tax purposes. Topco LLC’s previously wholly-owned U.S. subsidiary, Maravai Life Sciences, Inc.
(“Maravai Inc.”) and its subsidiaries, were taxpaying entities in the U.S., Canada, and
the U.K. Maravai Inc.’s subsidiaries were sold and Maravai Inc. ceased to be a regarded entity
and was deemed liquidated for U.S. tax purposes during the year ended December 31, 2021. Topco
LLC’s other subsidiaries are treated as pass-through entities for federal and state income tax
purposes. The income or loss generated by these entities is not taxed at the LLC level. As required
by U.S. tax law, income or loss generated by these LLCs passes through to their owners. As such, our
tax provision consists solely of the activities of Maravai Inc. and its subsidiaries, prior to their
disposal, as well as our share of income generated by Topco LLC.
We
account for income taxes under the asset and liability method of accounting. Current income tax
expense or benefit represents the amount of income taxes expected to be payable or refundable for
the current year. We recognize deferred tax assets and liabilities for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, as well as for operating loss and tax credit
carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to
apply to taxable income in the years in which we expect to recover or settle those temporary
differences. We recognize the effect of a change in tax rates on deferred tax assets and liabilities
in the results of operations in the period that includes the enactment date. We reduce the
measurement of a deferred tax asset, if necessary, by a valuation allowance if it is more likely
than not that we will not realize some or all of the deferred tax asset.
The Company’s tax positions are subject to
income tax audits. We account for uncertain tax positions by recognizing the financial statement
effects of a tax position only when, based upon technical merits, it is more likely than not that
the position will be sustained upon examination. Significant judgment is required in determining the
accounting for income taxes. In the ordinary course of business, many transactions and calculations
arise where the ultimate tax outcome is uncertain. Our judgments, assumptions and estimates relative
to the accounting for income taxes take into account current tax laws, our interpretation of current
tax laws, and possible outcomes of future audits conducted by foreign and domestic tax authorities.
Although we believe that our estimates are reasonable, the final tax outcome of matters could be
different from our assumptions and estimates used when determining the accounting for income taxes.
Such differences, if identified in future periods, could have a material effect on the amounts
recorded in our consolidated financial statements. Interest and penalties related to unrecognized
tax benefits are recognized in income tax expense in the accompanying consolidated statements of
income. The provision for income taxes includes the effects of any accruals that the Company
believes are appropriate, as well as any related net interest and penalties.
Payables
to Related Parties Pursuant to the Tax Receivable Agreement
In
November 2020, we entered into a Tax Receivable Agreement (“TRA”) with MLSH 1 and MLSH 2.
The TRA provides for the payment by us to MLSH 1 and MLSH 2, collectively, of
85% of the amount of tax benefits, if any, that we actually realize, or in some
circumstances are deemed to realize from exchanges of LLC Units (together with the corresponding shares
of Class B common stock) for Class A common stock, as a result of (i) certain increases in the tax basis
of assets of Topco LLC and its subsidiaries resulting from purchases or exchanges of LLC Units, (ii)
certain tax attributes of the Organization Transactions and (iii) certain other tax benefits related to
our entering into the TRA, including tax benefits attributable to payments that we make under the TRA
(collectively, the “Tax Attributes”). The payment obligations under the TRA are not
conditioned upon any LLC Unitholder maintaining a continued ownership interest in us or Topco LLC and
the rights of MLSH 1 and MLSH 2 under the TRA are assignable. We expect to benefit from the remaining
15% of the tax benefits, if any, that we may actually realize.
We accrue a liability for the payable to related parties for the TRA and a reduction
to stockholders’ equity, when it is deemed probable that the Tax Attributes will be used to
reduce our taxable income, as the contractual percentage of the benefit of Tax Attributes that we
expected to receive over a period of time. The current portion, if any, of the liability is the
amount estimated to be paid within one year of the consolidated balance sheet date. For purposes of
estimating the value of the payable to related parties for the TRA, the tax benefit deemed realized
by us and payable to MLSH 1 and MLSH 2 is computed by taking
85% of the difference of between our undiscounted forecasted cash income tax
liability over the term of benefit of the Tax Attributes and the forecasted amount of such taxes
that we would have been required to pay had there been no Tax Attributes. The TRA applies to each of
our taxable years, beginning with the taxable year that the TRA is entered into. There is no maximum
term for the TRA and the TRA will continue until all such tax benefits have been utilized or expired
unless we exercise our right to terminate the TRA for an agreed-upon amount equal to the estimated
present value of the remaining payments to be made under the agreement. We may record additional
liabilities under the TRA when LLC Units of Topco LLC are exchanged in the future and as our
estimates of the future utilization of the tax benefits change. If, due to a change in facts, these
tax attributes are not utilized in future years, it is reasonably possible no amounts would be paid
under the TRA. In this scenario, the reduction of the liability under the TRA would result in a
benefit to our consolidated statements of income. Subsequent adjustments to the payable to related
parties for the TRA based on changes in anticipated future taxable income are recorded in our
consolidated statements of income.
Non-Controlling
Interests
Non-controlling
interests represent
the portion of profit or loss, net assets and comprehensive income of our consolidated subsidiaries
that is not allocable to the Company based on our percentage of ownership of such entities.
Non-controlling interests consist of the following:
•Until
November, 2020 Topco LLC held a
70% ownership interest in MLSC Holdings, LLC (“MLSC”) through its
consolidated subsidiaries with the remaining
30% being recorded as non-controlling interests in our consolidated financial
statements.
MLSC
net income or loss was attributed to the non-controlling interests using an attribution method,
similar to the hypothetical liquidation at book value method, based on the distribution provisions
of the MLSC Amended and Restated Limited Liability Company Agreement (“MLSC LLC
Agreement”). In November 2020, and before the closing of the IPO, Topco LLC repurchased all of
the outstanding non-controlling interests in MLSC for $
166.4 million (see Note 13).
•In
November 2020, following the completion of the Organizational Transactions, we became the sole
managing member of Topco LLC. As of December 31, 2022,
we held approximately
51.6% of the outstanding LLC Units of Topco LLC, and MLSH 1 held approximately
48.4% of the outstanding LLC Units of Topco LLC. Therefore, we report
non-controlling interests based on the percentage of LLC Units of Topco LLC held by MLSH 1 on our
consolidated balance sheet as of December 31, 2022. Income or loss attributed to the
non-controlling interest in Topco
LLC
is based on the LLC Units outstanding during the period for which the income or loss is generated
and is presented on the consolidated statements of income and consolidated statements of
comprehensive income.
MLSH
1 is entitled to exchange LLC Units, together with an equal number of shares of our Class B common
stock (together referred to as “Paired Interests”), for shares of Class A common stock
on a
one-for-one basis or, at our election, for cash, from a substantially
concurrent public offering or private sale (based on the price of our Class A common stock in such
public offering or private sale). As such, future exchanges of Paired Interests by MLSH 1 will
result in a change in ownership and reduce or increase the amount recorded as non-controlling
interests and increase or decrease additional paid-in-capital when Topco LLC has positive or
negative net assets, respectively.
Segment
Information
The
Company has historically operated in
three reportable segments. Operating segments are defined as components of an
enterprise for which separate financial information is evaluated regularly by the Company’s
chief operating decision maker (“CODM”) in deciding how to allocate resources and
assessing performance. The CODM allocates resources and assesses performance based upon discrete
financial information at the segment level. All of our long-lived assets are located in the United
States. After the divestiture of Vector in September 2021, the Company no longer has the Protein
Detection segment. The Company has reported the historical results of the Protein Detection business
as such discrete financial information evaluated by the CODM for the periods presented included the
information for this legacy segment. As of December 31, 2022, the Company operated in
two reportable segments: Nucleic Acid Production and Biologics Safety
Testing.
Cash
Cash
consists of deposits held at financial institutions.
Accounts
Receivable and Allowance for Credit Losses
Accounts
receivable primarily consist of amounts due from customers for product sales and services. The
Company’s expected credit losses are developed using an estimated loss rate method that
considers historical collection experience, current conditions, and reasonable and supportable
forecasts that affect the collectability of the reported amount. The estimated loss rates are
applied to trade receivables with similar risk characteristics such as the length of time the
balance has been outstanding, liquidity and financial position of the customer, and the geographic
location of the customer. In certain instances, the Company may identify individual accounts
receivable assets that do not share risk characteristics with other accounts receivable, in which
case the Company records its expected credit losses on an individual asset basis.
As
of December 31, 2022 and 2021, the allowance for credit losses was approximately $
2.2 million and $
0.3 million, respectively. Write-offs of accounts receivable and recoveries
were not significant during the years ended December 31, 2022 or 2021.
Inventory
Inventories
consist of raw materials, work in process and finished goods. Inventories are stated at the lower of
cost (weighted average cost) or net realizable value. Inventory costs, which relate to the purchase
or production of inventories, include materials, direct labor and manufacturing overhead. The
Company regularly monitors for excess and obsolete inventory based on its estimates of expected
sales volumes, production capacity and expiration of raw materials, work-in-process and finished
products, and reduces the carrying value of inventory accordingly. The Company writes down inventory
that has become obsolete, inventory that has a cost basis in excess of its expected net realizable
value, and inventory in excess of expected manufacturing requirements. Any write-downs of
inventories are charged to cost of revenue.
A
change in the estimated timing or amount of demand for the Company’s products could result in
reduction to the recorded value of inventory quantities on hand. Any significant unanticipated
changes in demand or unexpected quality failures could have a significant impact on the value of
inventory and reported operating results. During all periods presented in the accompanying
consolidated financial statements, there have been no material adjustments related to a revised
estimate of our inventory valuations.
Government
Assistance
The
consideration awarded to the Company by the U.S. Department of Defense is outside the scope of the
contracts with customers, income tax, funded research and development, and contribution guidance.
This is because the awarding entity is not considered to be a customer, the receipt of the funding
is not predicated on the Company’s income tax position, there are no refund provisions, and
the entity is not receiving reciprocal value for their support provided to the Company. The
Company’s elected policy is to recognize such assistance as a reduction to the carrying amount
of the assets associated with the award when
it is reasonably assured that the funding will
be received as evidenced through the existence of an arrangement, amounts eligible for reimbursement
are determinable and have been incurred or paid, the applicable conditions under the arrangement
have been met, and collectability of amounts due is reasonably assured.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the
straight-line method over the following estimated useful lives:
|
|
|
|
|
|
|
|
|
| Assets
|
|
Estimated
Useful Life |
|
Leasehold
improvements |
|
12 years
|
| Furniture,
fixtures, equipment and software |
|
3 -
7 years
|
Leasehold
improvements are amortized over the shorter of the related lease term or useful life.
Maintenance
and repairs are charged to operations when incurred, while betterments or renewals are capitalized.
When property and equipment are sold or otherwise disposed of, the asset account and related
accumulated depreciation account are relieved, and any gain or loss is included in the results of
operations.
The
Company records certain government grants earned related to capital projects as a reduction to
property and equipment.
Goodwill
Goodwill represents the excess of consideration
transferred over the estimated fair value of assets acquired and liabilities assumed in a business
combination. The Company conducts a goodwill impairment analysis at least annually and more
frequently if changes in facts and circumstances indicate that the fair value of the Company’s
reporting units may be less than carrying amount. In performing each annual impairment assessment
and any interim impairment assessment, the Company determines if it should qualitatively assess
whether it is more likely than not that the fair value of goodwill is less than its carrying amount
(the qualitative impairment test). If it is more likely than not that the fair value of the
reporting unit is less than its carrying amount, or if the Company elects not to perform the
qualitative impairment test, the Company then performs a quantitative impairment test. The
Company’s annual or interim quantitative impairment testing is performed by comparing the
estimated fair value of the reporting unit to its carrying value. An impairment charge is recognized
for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to
exceed the carrying value of goodwill.
Intangible
Assets
The
Company’s finite-lived intangible assets represent purchased intangible assets and primarily
consist of trade names, customer relationships, patents, and developed technology. Certain criteria
are used in determining whether intangible assets acquired in a business combination must be
recognized and reported separately. Finite-lived intangible assets are initially recognized at fair
value, are subject to amortization and are subsequently stated at amortized cost. The
Company’s finite-lived intangible assets are amortized using a method that reflects the
pattern in which the economic benefits of the intangible assets are consumed or otherwise used. If
that pattern cannot be reliably determined, the intangible assets are amortized using the
straight-line method over their estimated useful lives and are tested for impairment along with
other long-lived assets. Amortization related to patents and developed technology is allocated to
cost of revenue whereas amortization associated with trade names and customer relationships is
allocated to selling, general and administrative expenses.
Impairment
of Long-Lived and Intangible Assets
The
Company periodically reviews long-lived assets, including property and equipment, right-of-use
operating lease assets and finite-lived intangible assets, to determine whether current events or
circumstances indicate that such carrying amounts may not be recoverable. If such facts or
circumstances are determined to exist, an estimate of the undiscounted future cash flows of these
assets is compared to the carrying value of the assets to determine whether impairment exists. If
the assets are determined to be impaired, the loss is measured based on the difference between the
fair value and carrying value of the assets. If we determine that events and circumstances warrant a
revision to the remaining period of amortization or depreciation for a specific long-lived asset,
its remaining estimated useful life will be revised, and the remaining carrying amount of the
long-lived asset will be depreciated or amortized prospectively over the revised remaining estimated
useful life. No impairment loss was recognized for long-lived assets for any period
presented.
Contingent
Consideration
Contingent
consideration represents additional consideration that may be transferred to former owners of an
acquired entity in the future if certain future events occur or conditions are met. Contingent
consideration resulting from the acquisition of a business is recorded at fair value on the
acquisition date. Such contingent consideration is re-measured to its estimated fair value at each
reporting date with the change in fair value recognized within operating expenses in the
Company’s consolidated statements of income. Subsequent changes in the fair value of the
contingent consideration are classified as an adjustment to cash flows from operating activities in
the consolidated statements of cash flows because the change in fair value is an input in
determining net income. Cash paid in settlement of contingent consideration liabilities are
classified as cash flows from financing activities up to the acquisition date fair value with any
excess classified as cash flows from operating activities.
Changes
in the fair value of contingent consideration liabilities associated with the acquisition of a
business can result from updates to assumptions such as the expected timing or probability of
achieving customer-related performance targets, specified sales milestones, changes in projected
revenue or changes in discount rates. Judgment is used in determining those assumptions as of the
acquisition date and for each subsequent reporting period. Therefore, any changes in the fair value
will impact the Company’s results of operations in such reporting period, thereby resulting in
potential variability in the Company’s operating results until such contingencies are
resolved.
Debt
Issuance Costs
Costs
incurred in connection with obtaining new debt financing are deferred and amortized over the life of
the related financing. If such financing is settled or replaced prior to maturity with debt
instruments that have substantially different terms, the settlement is treated as an extinguishment
and the unamortized costs are charged to gain or loss on extinguishment of debt. If such financing
is settled or replaced with debt instruments from the same lender that do not have substantially
different terms, the new debt agreement is accounted for as a modification for the prior debt
agreement and the unamortized costs remain capitalized, the new original issuance discount costs are
capitalized, and any new third-party costs are charged to expense. Deferred costs are recognized as
a direct reduction in the carrying amount of the debt instrument on the consolidated balance sheets
and are amortized to interest expense over the term of the related debt using the effective interest
method.
Accumulated
Other Comprehensive Income (Loss)
Comprehensive
income (loss) and its components encompass all changes in equity other than those with stockholders
or member. Comprehensive income (loss) for the Company consists of foreign currency translation
adjustments. There were no reclassifications out of accumulated other comprehensive loss during the
periods presented.
Fair
Value of Financial Instruments
The
Company defines fair value as the amount that would be received to sell an asset, or paid to
transfer a liability, in an orderly transaction between market participants at the measurement date.
The Company follows accounting guidance that has a three-level hierarchy for fair value measurements
based upon the transparency of inputs to the valuation of the asset or liability as of the
measurement date. Instruments with readily available actively quoted prices, or for which fair value
can be measured from actively quoted prices in an orderly market, will generally have a higher
degree of market price transparency and a lesser degree of judgment used in measuring fair value.
The three levels of the hierarchy are defined as follows:
Level 1—Observable
inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active
markets;
Level 2—Include
other inputs that are directly or indirectly observable in the marketplace; and
Level 3—Unobservable
inputs which are supported by little or no market activity.
As
of December 31, 2022 and 2021, the carrying value of current assets and liabilities
approximates fair value due to the short maturities of these instruments. The fair values of the
Company’s long-term debt approximate carrying value, excluding the effect of unamortized debt
discount, as it is based on borrowing rates currently available to the Company for debt with similar
terms and maturities (Level 2 inputs).
Acquisitions
The
Company evaluates mergers, acquisitions and other similar transactions to assess whether or not the
transaction should be accounted for as a business combination or an acquisition of assets. The
Company first identifies the acquiring entity by determining if the target is a legal entity or a
group of assets or liabilities. If control over a legal entity is being evaluated, the Company also
evaluates if the target is a variable interest or voting interest entity. For acquisitions of voting
interest entities, the Company applies a screen test to determine if substantially all of the fair
value of the gross assets acquired is concentrated in a single identifiable asset or group of
similar identifiable assets. If the screen test is met, the transaction is accounted for as an
acquisition
of assets. If the screen is not met, further determination is required as to whether or not the
Company has acquired inputs and processes that have the ability to create outputs which would meet
the definition of a business.
The
Company accounts for its business combinations using the acquisition method of accounting which
requires that the assets acquired and liabilities assumed of acquired businesses be recorded at
their respective fair values at the date of acquisition. The purchase price, which includes the fair
value of consideration transferred, is attributed to the fair value of the assets acquired and
liabilities assumed. The purchase price may also include contingent consideration. The Company
assesses whether such contingent consideration is subject to liability classification and fair value
measurement or meets the definition of a derivative. Contingent consideration liabilities are
recognized at their estimated fair value on the acquisition date. Contingent consideration
arrangements that are determined to be compensatory in nature are recognized as post combination
expense in our consolidated statements of income ratably over the implied service period beginning
in the period it becomes probable such amounts will become payable. The excess of the purchase price
of the acquisition over the fair value of the identifiable net assets of the acquiree is recorded as
goodwill. The fair value of assets acquired and liabilities assumed in certain cases may be subject
to revision based on the final determination of fair value during a period of time not to exceed
twelve months from the acquisition date. The results of acquired businesses are included in the
Company’s consolidated financial statements from the date of acquisition. Transaction costs
directly attributable to acquired businesses are expensed as incurred.
Determining
the fair value of assets acquired and liabilities assumed requires management to use significant
judgment and estimates, including the selection of valuation methodologies and assumptions about
future net cash flows, discount rates and market participants. Each of these factors can
significantly affect the value attributed to the identifiable intangible asset acquired in a
business combination.
Leases
The
Company determines whether the arrangement is or contains a lease based on the unique facts and
circumstances present at the inception of the arrangement and if such a lease is classified as a
financing lease or operating lease. Leases with a term greater than one year are included in other
assets, accrued expenses and other current liabilities, and other long-term liabilities on our
balance sheet as of December 31, 2022 and 2021. The Company has elected not to recognize on the
balance sheet leases with terms of one year or less.
Right-of-use
(“ROU”) assets represents the Company’s right to use an underlying asset for the
lease term and lease liabilities represent the Company’s obligation to make lease payments
arising from the lease contract. Lease liabilities and their corresponding ROU assets are recorded
based on the present value of lease payments over the expected lease term. In determining the net
present value of lease payments, the interest rate implicit in lease contracts is typically not
readily determinable. As such, the Company utilizes the appropriate incremental borrowing rate,
which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal
to the lease payments in a similar economic environment. Certain adjustments to the ROU asset may be
required for items such as initial direct costs paid or incentives received and impairment charges
if we determine the ROU asset is impaired.
The
Company considers a lease term to be the noncancelable period that it has the right to use the
underlying asset, including any periods where it is reasonably assured the Company will exercise the
option to extend the contract. Periods covered by an option to extend are included in the lease term
if the lessor controls the exercise of that option.
The
Company recognizes lease expense on a straight-line basis over the expected lease term. Variable
lease payments, for items such as maintenance and utilities, are not included in the calculation of
the ROU asset and the related lease liability and are recognized as this lease expense is
incurred.
The
Company has elected to not separate lease and non-lease components for its leased assets and
accounts for all lease and non-lease components of its agreements as a single lease component. The
lease components resulting in a ROU asset have been recorded on the balance sheet and amortized as
lease expense on a straight-line basis over the lease term.
Concentration of Credit Risk
Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of cash and accounts
receivable. The Company maintains the majority of its cash balances at multiple financial
institutions that management believes are of high-credit quality and financially stable. Cash is
deposited with major financial institutions in excess of Federal Deposit Insurance Corporation
(“FDIC”) insurance limits. The Company believes it is not exposed to significant credit
risk due to the financial strength of the depository institutions in which the cash is held. The
Company provides credit, in the normal course of business, to international and domestic
distributors as well as certain customers, which are geographically dispersed. The Company attempts
to limit its credit risk by performing ongoing credit evaluations of its customers and maintaining
adequate allowances for potential credit losses.
The
following table summarizes revenue from each of our customers who individually accounted for 10% or
more of our total revenue or accounts receivable for the periods presented:
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|
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|
Revenue
|
|
Accounts
Receivable, net |
|
Years
Ended December 31, |
|
As
of December 31, |
|
2022
|
|
2021
|
|
2020
|
|
2022
|
|
2021
|
| BioNTech
SE |
34.8
|
%
|
|
29.5
|
%
|
|
16.7
|
%
|
|
12.0
|
%
|
|
*
|
| Pfizer
Inc. |
26.4
|
%
|
|
23.3
|
%
|
|
14.2
|
%
|
|
19.2
|
%
|
|
23.6
|
%
|
| CureVac
N.V. |
*
|
|
15.3
|
%
|
|
*
|
|
15.7
|
%
|
|
46.5
|
%
|
| Nacalai
USA, Inc. |
*
|
|
*
|
|
*
|
|
20.3
|
%
|
|
11.6
|
%
|
____________________
*Less
than 10%
For
the year ended December 31, 2022, substantially all of the revenue recorded for BioNTech SE, Pfizer
Inc., and CureVac N.V. was generated by our Nucleic Acid Production segment. For the year ended
December 31, 2021, substantially all of the revenue recorded for BioNTech SE, Pfizer Inc. and
CureVac N.V. was generated by our Nucleic Acid Production segment. For the year ended December 31,
2020, substantially all of the revenue recorded for BioNTech SE and Pfizer Inc. was generated by our
Nucleic Acid Production segment.
Net Income per Class A Common
Share/Unit Attributable to Maravai LifeSciences Holdings, Inc.
Basic net income per Class A common share/unit
attributable to Maravai LifeSciences Holdings, Inc. is computed by dividing net income attributable
to us by the weighted average number of Class A common shares/units outstanding during the period.
The non-controlling interest, for historical periods prior to the IPO, is calculated pursuant to the
terms of the MLSC LLC Agreement on a fully-distributed basis, taking into account the various
classes of equity of MLSC, including the cumulative yields on MLSC’s preferred units. Diluted
net income per Class A common share/unit is calculated by giving effect to all potential weighted
average dilutive LLC incentive units for historical periods prior to the IPO and stock options,
restricted stock units, performance stock units and Topco LLC Units, that together with an equal
number of shares of our Class B common stock (together referred to as “Paired
Interests”) are convertible into shares of our Class A common stock, for the period after the
IPO. For historical periods prior to the IPO, the weighted average number of common units
outstanding during the period and the potential dilutive common unit equivalents is determined under
the two-class method. The dilutive effect of outstanding awards, if any, is reflected in diluted
earnings per share/unit by application of the treasury stock method or if-converted method, as
applicable. In periods in which the Company reports a net loss attributable to Maravai LifeSciences
Holdings, Inc. diluted net loss per Class A common share/unit attributable to the Company since
dilutive equity instruments are not assumed to have been issued if their effect is anti-dilutive.
Recently
Adopted Accounting Pronouncements
In
October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) 2021-08, Business
Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts
with Customers (“ASU
2021-08”), which requires an acquirer in a business combination to recognize and measure
contract assets and contract liabilities in accordance with ASC 606, Revenue
from Contracts with Customers, as
if it had originated the contracts. This approach differs from the current requirement to measure
contract assets and contract liabilities acquired in a business combination at fair value. ASU
2021-08 is effective for years beginning after December 31, 2022, including interim periods within
those fiscal years, with early adoption permitted. The ASU is to be applied prospectively to
business combinations occurring on or after the effective date of its adoption. The Company early
adopted ASU 2021-08, and there was no impact to the Company’s consolidated financial
statements as a result of the adoption of this ASU.
In
November 2021, the FASB issued ASU 2021-10, Government
Assistance (Topic 832) - Disclosures by Business Entities about Government Assistance (“ASU
2021-10”). ASU 2021-10 provides guidance to increase the transparency of government assistance
including the disclosure of: (i) the types of assistance, (ii) an entity’s accounting for the
assistance, and (iii) the effect of the assistance on an entity’s financial statements. Under
the new guidance, an entity is required to provide the following annual disclosures about
transactions with a government that are accounted for by applying a grant or contribution accounting
model by analogy: (i) information about the nature of the transactions and the related accounting
policy used to account for the transactions, (ii) the line items on the balance sheet and income
statement that are affected by the transactions, and the amounts applicable to each financial
statement line item, and (iii) significant terms and conditions of the transactions, including
commitments and contingencies. The new guidance is required to be adopted either: (i) prospectively
to all transactions within the scope of the amendments that are reflected in financial statements at
the date of initial application and new transactions that are entered into after the date of initial
application, or (ii) retrospectively to those transactions. The Company adopted ASU
2021-10 on January 1, 2022 using the prospective
method and is complying with the related disclosure requirements (see Note 6).
2.
Acquisitions and Divestiture
Acquisitions
MyChem,
LLC
On
January 27, 2022, the Company completed the acquisition of MyChem, LLC (“MyChem”), a
privately-held San Diego, California-based provider of ultra-pure nucleotides to customers in the
diagnostics, pharma, genomics and research markets. The acquisition will vertically integrate the
Company’s supply chain and expand its product offerings for inputs used in the development of
therapeutics and vaccines.
The
Company acquired MyChem for a total purchase consideration of $
257.9 million, which is inclusive of net working capital adjustments. The total
cash consideration was paid using existing cash on hand. The transaction was accounted for as an
acquisition of a business as MyChem consisted of inputs and processes applied to those inputs that had
the ability to contribute to the creation of outputs.
For
the year ended December 31, 2022, the Company incurred $
3.5 million in transaction costs associated with the acquisition of MyChem, which
were recorded within selling, general and administrative expenses in the consolidated statements of
income.
The
acquisition date fair value of consideration transferred to acquire MyChem consisted of the
following (in thousands):
|
|
|
|
|
|
|
Cash
paid (1)
|
$
|
240,145
|
|
| Consideration
payable |
10,000
|
|
| Fair
value of contingent consideration |
7,800
|
|
|
Total
consideration transferred |
$
|
257,945
|
|
____________________
(1)Represents
cash consideration paid at closing of $
240.0 million and a purchase price adjustment paid in November 2022 of $
0.1 million.
Pursuant
to the Securities Purchase Agreement (the “MyChem SPA”) between the Company and sellers of
MyChem, additional payments to the sellers of MyChem are dependent upon meeting or exceeding defined
revenue targets during fiscal 2022 (the “Performance Payment”). The MyChem SPA provides for
a total maximum Performance Payment of $
40.0 million. The MyChem SPA also provides that the Company will pay to the sellers
of MyChem an additional $
20.0 million (the “Retention Payment”) as of the second anniversary of
the closing of the acquisition date as long as two senior employees who are also the sellers of MyChem
continue to be employed by TriLink. The Company considers the payment of the Retention Payment as
probable and is recognizing compensation expense related to this payment in the post-acquisition period
ratably over the expected service period of
two years. The MyChem SPA further provides that the Company will pay to the sellers
of MyChem an additional amount of up to $
10.0 million subject to the completion of certain calculations associated with
acquired inventory, which has been recorded within accrued expenses and other current liabilities on the
consolidated balance sheet as of December 31, 2022. The Performance Payment was recorded as
contingent consideration and was included as part of the purchase consideration. For the year ended
December 31, 2022, the Company recorded $
9.3 million of compensation expense related to the Retention Payment within
research and development expenses in the consolidated statements of income.
The
Company estimated the fair value of the Performance Payment contingent consideration based on a
Monte-Carlo simulation model which utilized an income approach. The estimated fair value was based on
MyChem revenue projections, expected payout term, volatility and risk adjusted discount rates which are
Level 3 inputs (see Note 4).
As
the Company is in the process of finalizing the evaluation of certain liabilities and assets, the
allocation of purchase consideration is preliminary, and provisional measurements of certain liabilities
and goodwill are subject to change. The
following
table summarizes the estimated fair values of the assets acquired and liabilities assumed at the
acquisition date (in thousands):
|
|
|
|
|
|
| Cash
|
$
|
1,176
|
|
| Current
assets |
2,741
|
|
| Intangible
assets, net |
123,360
|
|
| Other
assets |
8,585
|
|
|
Total
identifiable assets acquired |
135,862
|
|
| Current
liabilities |
(
420) |
|
| Other
long-term liabilities |
(
8,399) |
|
|
Total
liabilities assumed |
(
8,819) |
|
| Net
identifiable assets acquired |
127,043
|
|
| Goodwill
|
130,902
|
|
| Net
assets acquired |
$
|
257,945
|
|
We
recorded the preliminary purchase price allocation in the first quarter of 2022. During the fourth
quarter of 2022, we recorded measurement period adjustments resulting in an increase to goodwill of $
0.1 million and a decrease to other assets and current liabilities of $
0.7
million.
The
acquisition was accounted for under the acquisition method of accounting, and therefore, the total
purchase price was allocated to the identifiable tangible and intangible assets acquired and the
liabilities assumed based on their respective fair values as of the acquisition date. Purchase
consideration in excess of the amounts recognized for the net assets acquired was recognized as
goodwill. Goodwill is primarily attributable to expanded synergies expected from the acquisition
associated with a vertical supply integration. There were no tax impacts associated with the acquisition
due to the pass-through income tax treatment of MyChem. All of the goodwill acquired in connection with
the acquisition of MyChem was allocated to the Company’s Nucleic Acid Production segment and is
deductible to Topco LLC for income tax purposes.
Upon
closing of the acquisition, approximately $
1.0 million was placed into escrow to cover potential working capital adjustments
and approximately $
12.5 million was placed into escrow to secure certain representations and
warranties pursuant to the terms of the MyChem SPA. These amounts are included in the total purchase
consideration of $
257.9 million. The Company released the $
1.0 million in escrow and paid out an additional $
0.1 million related to net working capital adjustments during the fourth quarter of
2022. Because the remaining $
12.5 million held in escrow is not controlled by the Company, it is not included in
the accompanying consolidated balance sheet as of December 31, 2022.
The
following table summarizes the estimated fair values of MyChem’s identifiable intangible
assets as of the date of acquisition and their estimated useful lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Fair Value (in thousands) |
|
Estimated
Useful Life (in years) |
| Trade
names |
$
|
460
|
|
|
3
|
| Developed
technology |
121,000
|
|
|
12
|
| Customer
relationships |
1,900
|
|
|
12
|
|
Total
|
$
|
123,360
|
|
|
|
The
trade name and customer relationship intangible assets are related to MyChem’s name, customer
loyalty and customer relationships. The developed technology intangible asset is related to processes
and techniques for synthesizing and developing ultra-pure nucleotides. The fair value of these
intangible assets was based on MyChem’s projected revenues and was estimated using an income
approach, specifically the multi-period excess earnings method. Under the income approach, an intangible
asset’s fair value is equal to the present value of future economic benefits to be derived from
ownership of the asset. The estimated fair value was developed by discounting future net cash flows to
their present value at market-based rates of return utilizing Level 3 inputs. The useful lives for these
intangible assets were determined based upon the remaining period for which the assets were expected to
contribute directly or indirectly to future cash flows. Key quantitative assumptions used in the
determination of fair value of the developed technology intangible included revenue growth rates ranging
from
3.0% to
30.6%, a discount rate of
16.5% and an assumed technical obsolescent curve range of
5.0% to
7.5%.
Pursuant
to the terms of the MyChem SPA, the Company recognized an indemnification asset of $
8.0 million within other assets, which represented the seller’s obligation to
reimburse pre-acquisition income tax liabilities assumed in the acquisition and was recorded within
other long-term liabilities.
The
carrying value of the remaining assets acquired or liabilities assumed was estimated to equal their fair
values based on their short-term nature. These estimates were based on the assumption that the Company
believes to be reasonable; however, actual results may differ from these estimates.
Revenue
and earnings from MyChem included in the Company’s consolidated statements of income since the
date of acquisition were immaterial.
No
proforma revenue or earnings information for the years ended December 31, 2022 and 2021 have been
presented as the impact was not determined to be material to the Company’s consolidated revenues
and net income for the respective periods.
Mock
V Solutions, Inc.
In
March 2020, the Company acquired all of the outstanding shares of MockV Solutions, Inc.
(“MockV”), a private entity, for $
3.0 million, inclusive of acquisition costs of $
0.2 million. The MockV technology acquired is a novel, proprietary viral clearance
prediction tool that includes a non-infectious “mock virus particle” mimicking the
physicochemical properties of live virus that may be present endogenously in the drug substance or
introduced during bioproduction and will expand the Company biologics safety testing offerings. The
transaction was accounted for as an asset acquisition as the acquired set of assets and activities did
not meet the definition of a business. In connection with this acquisition, the Company acquired
developed technology, an in-process research and development asset (“IPR&D”), an
assembled workforce, and an insignificant amount of working capital balances. The relative fair value
attributed to the acquired developed technology, assembled workforce, and working capital balances was
insignificant. The IPR&D acquired was allocated a value of $
2.9 million and the Company recognized a charge of $
2.9 million related to the IPR&D as a component of research and
development expenses on the consolidated statements of income because the technology had not yet reached
technological feasibility and had no alternative future use. The Company must also make contingent cash
payments (the “Earn-Outs”) of up to $
9.0 million to the sellers of MockV based upon the achievement of long-term revenue
targets. The Earn-Outs were determined to be contingent consideration that was not subject to derivative
accounting and will be recognized when the contingency is resolved, and the consideration becomes paid
or payable. As of December 31, 2022 and 2021, no such amounts were deemed to be payable.
As
the Company had no tax basis in the acquired IPR&D asset, and the acquired IPR&D asset was
expensed prior to the measurement of any deferred taxes, no deferred taxes were recognized for the
initial transaction.
In
November 2020, MockV was converted into a single member LLC and was deemed liquidated for income tax
purposes.
Divestiture
Vector
Laboratories, Inc.
In
August 2021, the Company entered into a definitive agreement to sell Vector to Voyager Group Holdings,
Inc. (“Voyager”), a third-party unrelated to the Company, for an all cash sale price of $
124.0 million, subject to purchase price adjustments. The Company determined that
the fair value of Vector, less estimated costs to sell, exceeded the book value of the Vector Disposal
Group and there were no other indicators of asset impairment prior to the sale. The divestiture was
completed in September 2021, and final net proceeds were $
120.7 million, which were inclusive of working capital adjustments.
As
a result of the divestiture, during the year ended December 31, 2021, the Company recognized a pre-tax
gain on sale of $
11.2 million, net of transactions costs of $
0.9 million, in the consolidated statements of income.
The
Company’s Protein Detection segment was comprised of Vector. The sale of Vector represents a
strategic shift as the Company will no longer be in the protein detection business after the sale.
However, the sale did not qualify for presentation as discontinued operations since the sale of the
Protein Detection segment did not have a major effect on the Company’s operations or financial
results.
In
connection with the divestiture, the Company entered into a Transition Services Agreement
(“TSA”) with Voyager to help support its ongoing operations. Under the TSA, the Company will
provide certain transition services to Voyager, including information technology, finance and ERP,
marketing and commercial, human resources, employee benefits, and other limited services. Depending on
the service, the initial period ranges from
one month to
five months and the extension period ranges from
one month to
eight months. Income from performing services under the TSA was recorded within
other income in the consolidated statements of income and was not significant for the year ended
December 31, 2021.
In
August 2020, the Company entered into an agreement with an executive of Vector whereby the executive
received incentive units of MLSH 1. In connection with the divestiture, MLSH 1 amended this
executive’s incentive units resulting in the
recognition of incremental unit-based compensation
expense in the Company’s consolidated financial statements of $
2.4 million. This unit-based compensation expense was recorded within selling,
general and administrative expenses in the consolidated statements of income for the year ended December
31, 2021.
3.
Goodwill and Intangible Assets
The
Company’s goodwill of $
283.7 million and $
152.8 million as of December 31, 2022 and 2021 respectively, represents the
excess of purchase consideration over the fair value of assets acquired and liabilities assumed. As of
December 31, 2022 and 2021, the Company had
three reporting units,
two of which are contained in the Nucleic Acid Production segment. During the year
ended December 31, 2022, the Company recorded goodwill of $
130.9 million in connection with the acquisition of MyChem that was completed in
January 2022 (see Note 2). The Company performed a qualitative goodwill impairment analysis on each of
its
three reporting units during the fourth quarter of 2022 and concluded that it was
more likely than not that the fair value of goodwill exceeded its carrying value and no further testing
was required. The Company has not recognized any goodwill impairment charges in any of the periods
presented.
The
following table summarizes the activity in the Company’s goodwill by segment for the periods
presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nucleic Acid
Production |
|
Biologics
Safety Testing |
|
Total
|
| Balance
as of December 31, 2021 |
$
|
32,838
|
|
|
$
|
119,928
|
|
|
$
|
152,766
|
|
|
Acquisition
|
130,902
|
|
|
—
|
|
|
130,902
|
|
| Balance
as of December 31, 2022 |
$
|
163,740
|
|
|
$
|
119,928
|
|
|
$
|
283,668
|
|
Intangible
assets are being amortized on a straight-line basis, which reflects the expected pattern in which the
economic benefits of the intangible assets are being obtained, over an estimated useful life ranging
from
3 to
14 years.
The
following are components of finite-lived intangible assets and accumulated amortization as of the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2022 |
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Estimated Useful Life
|
|
Weighted Average Remaining Amortization Period
|
|
|
|
(in thousands)
|
|
|
|
(in
years) |
|
(in
years) |
| Trade
Names |
$
|
7,580
|
|
|
$
|
5,746
|
|
|
$
|
1,834
|
|
|
3 -
10
|
|
3.5
|
| Patents
and Developed Technology |
288,649
|
|
|
85,058
|
|
|
203,591
|
|
|
10 -
14
|
|
9.5
|
| Customer
Relationships |
21,853
|
|
|
10,615
|
|
|
11,238
|
|
|
10 -
12
|
|
6.5
|
| Total
|
$
|
318,082
|
|
|
$
|
101,419
|
|
|
$
|
216,663
|
|
|
|
|
9.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2021 |
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Estimated
Useful
Life
|
|
Weighted
Average
Remaining
Amortization
Period
|
|
|
|
(in thousands)
|
|
|
|
(in
years) |
|
(in
years) |
| Trade
Names |
$
|
7,120
|
|
|
$
|
5,012
|
|
|
$
|
2,108
|
|
|
5 -
10
|
|
2.9
|
| Patents
and Developed Technology |
167,648
|
|
|
63,465
|
|
|
104,183
|
|
|
5 -
14
|
|
8.5
|
| Customer
Relationships |
19,953
|
|
|
8,673
|
|
|
11,280
|
|
|
10 -
12
|
|
6.4
|
| Total
|
$
|
194,721
|
|
|
$
|
77,150
|
|
|
$
|
117,571
|
|
|
|
|
8.1
|
During
the first quarter of 2022, the Company recorded intangible assets of $
123.4 million in connection with the acquisition of MyChem that was completed in
January 2022 (see Note 2).
The
Company recognized $
21.5 million, $
12.4 million and $
12.7 million of amortization expense from intangible assets directly linked with
revenue generating activities within cost of revenue in the consolidated statements of income for the
years ended December 31, 2022, 2021 and 2020, respectively. Amortization expense for intangible
assets that are not directly related
to
sales generating activities of $
2.8 million, $
5.9 million and $
7.6 million was recorded as selling, general and administrative expenses for each
of the years ended December 31, 2022, 2021 and 2020, respectively.
As
of December 31, 2022, the estimated future amortization expense for finite-lived intangible
assets were as follows (in thousands):
|
|
|
|
|
|
| 2023
|
$
|
24,812
|
|
| 2024
|
24,812
|
|
| 2025
|
24,669
|
|
| 2026
|
24,432
|
|
| 2027
|
23,416
|
|
| Thereafter
|
94,522
|
|
|
Total
estimated amortization expense |
$
|
216,663
|
|
4.
Fair Value Measurements
The
following table summarizes the Company’s financial assets and liabilities that are measured at
fair value on a recurring basis by level within the fair value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurement as of December 31, 2022 |
|
Level
1 |
|
Level
2 |
|
Level
3 |
|
Total
|
| Assets
|
|
|
|
|
|
|
|
|
Interest
rate cap |
$
|
—
|
|
|
$
|
11,362
|
|
|
$
|
—
|
|
|
$
|
11,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
and liabilities measured at fair value on a recurring basis as of December 31, 2021 were
insignificant.
Contingent
Consideration
In
connection with the acquisition of MyChem (see Note 2), the Company is required to make contingent
payments to the sellers of up to $
40.0 million, subject to achieving certain revenue thresholds. The preliminary fair
value of the liability for the contingent payments recognized upon the acquisition as part of the
purchase accounting opening balance sheet totaled $
7.8 million. The preliminary fair value of the contingent consideration was
determined using a Monte-Carlo simulation-based model discounted to present value. Assumptions used in
this calculation are expected revenue, a discount rate of
16.9% and various probability factors. The ultimate settlement of the contingent
consideration could deviate from current estimates based on the actual results of these financial
measures. The contingent consideration projected year of payment is 2023. This liability is considered
to be a Level 3 financial liability that is remeasured each reporting period. Changes in fair value of
contingent consideration are recognized as a gain or loss and recorded within change in estimated fair
value of contingent consideration in the consolidated statements of income. During the second quarter of
2022, the Company recorded a $
7.8 million decrease in the estimated fair value of contingent consideration. This
was due to a change in the estimate associated with MyChem revenue projections reaching thresholds that
would trigger a contingent payment per the MyChem SPA.
The
following table provides a reconciliation of liabilities measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) for the period presented (in thousands):
|
|
|
|
|
|
|
Contingent
Consideration |
| Balance
as of December 31, 2021 |
$
|
—
|
|
|
Contingent
consideration related to the acquisition of MyChem |
7,800
|
|
|
Change
in estimated fair value of contingent consideration |
(
7,800) |
|
| Balance
as of December 31, 2022 |
$
|
—
|
|
5.
Balance Sheet Components
Inventory
Inventory
consisted of the following as of the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2022 |
|
December
31, 2021 |
| Raw
materials |
$
|
13,486
|
|
|
$
|
19,726
|
|
| Work-in-process
|
21,950
|
|
|
21,382
|
|
| Finished
goods |
7,716
|
|
|
10,449
|
|
|
Total
inventory |
$
|
43,152
|
|
|
$
|
51,557
|
|
Property
and equipment
Property
and equipment consisted
of the following as of the periods presented
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2022 |
|
December
31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
| Leasehold
improvements |
$
|
20,095
|
|
|
$
|
18,162
|
|
| Furniture,
fixtures, and equipment |
35,907
|
|
|
31,065
|
|
| Software
|
3,004
|
|
|
2,713
|
|
|
Total
|
59,006
|
|
|
51,940
|
|
| Less
accumulated depreciation |
(
19,502) |
|
|
(
12,532) |
|
|
Total
|
39,504
|
|
|
39,408
|
|
| Construction
in-progress |
13,190
|
|
|
6,924
|
|
|
Total
property and equipment, net |
$
|
52,694
|
|
|
$
|
46,332
|
|
Depreciation
expense totaled approximately $
7.6 million, $
6.4 million and $
5.6 million for the years ended December 31, 2022, 2021 and 2020,
respectively.
Other
assets
Other
assets consisted of the following as of the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2022 |
|
December
31, 2021 |
| Right-of-use
assets |
$
|
63,896
|
|
|
$
|
49,095
|
|
| Prepaid
lease payments |
27,253
|
|
|
—
|
|
| Interest
rate cap |
11,362
|
|
|
541
|
|
|
Indemnification
asset (see Note 2)
|
7,682
|
|
|
—
|
|
| Other
|
5,396
|
|
|
3,815
|
|
|
Total
other assets |
$
|
115,589
|
|
|
$
|
53,451
|
|
Accrued
expenses and other current liabilities
Accrued
expenses consisted
of the following as of the periods presented
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2022 |
|
December
31, 2021 |
| Employee
related |
$
|
19,873
|
|
|
$
|
18,894
|
|
| Inventory
holdback liability |
10,000
|
|
|
—
|
|
| Accrued
interest payable |
7,700
|
|
|
145
|
|
| Lease
liabilities, current portion |
6,269
|
|
|
3,722
|
|
| Professional
services |
4,093
|
|
|
2,897
|
|
| Customer
deposits |
1,665
|
|
|
2,429
|
|
| Sales
and use tax liability |
1,029
|
|
|
1,296
|
|
|
|
|
|
| Federal
tax liability |
—
|
|
|
102
|
|
| Other
|
2,742
|
|
|
5,089
|
|
|
Total
accrued expenses and other current liabilities |
$
|
53,371
|
|
|
$
|
34,574
|
|
Other
long-term liabilities
Other
long-term liabilities consisted of the following as of the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2022 |
|
December
31, 2021 |
| Non-current
lease liabilities |
$
|
51,556
|
|
|
$
|
40,906
|
|
|
Accrued
Retention Payments (see Note 2)
|
9,324
|
|
|
—
|
|
|
Acquisition
related tax liability (see Note 2)
|
7,682
|
|
|
—
|
|
| Other
|
413
|
|
|
160
|
|
|
Total
other long-term liabilities |
$
|
68,975
|
|
|
$
|
41,066
|
|
6.
Government Assistance
Cooperative
Agreement
In
May 2022, TriLink entered into a cooperative agreement (the “Cooperative Agreement”) with
the U.S. Department of Defense, as represented by the Joint Program Executive Office for Chemical,
Biological, Radiological and Nuclear Defense on behalf of the Biomedical Advanced Research and
Development Authority (“BARDA”), within the U.S. Department of Health and Human Services, to
advance the development of domestic manufacturing capabilities and to expand TriLink’s domestic
production capacity in its San Diego manufacturing campus (the “Flanders San Diego
Facility”) for products critical to the development and manufacture of mRNA vaccines and
therapeutics.
Pursuant
to certain requirements, BARDA awarded TriLink an amount equal to $
38.8 million or
50% of the construction and validation costs currently budgeted for the Flanders
San Diego Facility. The contract period of performance is May 2022 through December 2023, which is the
effective date of the Cooperative Agreement through the anticipated date of completion of construction
and validation of manufacturing capacity. Amounts reimbursed are subject to audit and may be recaptured
by the U.S. Department of Defense in certain circumstances.
The
Cooperative Agreement requires the Company to provide the U.S. Government with conditional priority
access and certain preferred pricing obligations for a
10-year period from the completion of the construction project for the production of
a medical countermeasure (or a component thereof) that the Company manufactures in the Flanders San
Diego Facility during a declared public health emergency.
During
the year ended December 31, 2022, the Company has received $
18.1 million of reimbursements
under the Cooperative Agreement, with offsets recorded to: (i) prepaid lease payments associated with
Flanders I (as defined in Note 7) within other
assets of $
17.0 million; and (ii) property
and equipment of $
1.1 million. As of December 31, 2022, the Company has recorded a receivable of
$
8.2 million, with an equal offset recorded to prepaid lease payments associated
with Flanders I within other assets on the consolidated balance sheet.
7.
Leases
All
of the Company's facilities, including office, laboratory and manufacturing space, are occupied
under long-term non-cancelable operating lease arrangements with various expiration dates through
2037, some of which include options to extend up to
20 years. The Company does not have any leases that include residual value
guarantees.
In
July 2022, the Company entered into a facility lease agreement for additional office, warehouse and
light lab space in San Diego, California. The lease term began in July 2022 and will end in
September 2026.
In
December 2022, the Company’s lease for a new manufacturing facility in Leland, North Carolina
commenced. The Company entered into this lease in June 2021 and construction began in November 2021.
The lease is for
10 years with the option to extend for
four
5-year periods. The Company is reasonably certain to execute the first renewal
option and has, therefore, recognized this as part of its ROU assets and lease liabilities. The
lease includes tenant improvement provisions, rent abatement, and escalating rent payments over the
life of the lease.
The
Company did not have any finance leases as of December 31, 2022 or 2021.
The
following table presents supplemental balance sheet information related to the Company's
operating leases as of the periods presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line
Item in the Consolidated Balance Sheet |
|
December
31, 2022 |
|
December
31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use
assets |
Other
assets |
|
$
|
63,896
|
|
|
$
|
49,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
liabilities, current portion |
Accrued
expenses and other current liabilities |
|
6,269
|
|
|
3,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
lease liabilities |
Other
long-term liabilities |
|
51,556
|
|
|
40,906
|
|
The
components of the net lease costs reflected in the Company's consolidated statements of income
were as follows for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
2022
|
|
2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease costs |
$
|
8,800
|
|
|
$
|
8,792
|
|
|
Variable
lease costs |
2,742
|
|
|
1,759
|
|
|
Total
lease costs |
$
|
11,542
|
|
|
$
|
10,551
|
|
The
weighted average remaining lease term and weighted average discount rate related to the
Company's ROU assets and lease liabilities for its operating leases were as follows as of the
periods presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2022 |
|
December
31, 2021 |
|
|
|
|
|
Weighted
average remaining lease term (in years) |
7.9
|
|
8.2
|
|
|
|
|
|
|
|
|
|
Weighted
average discount rate |
6.5
|
%
|
|
5.1
|
%
|
Supplemental
information concerning the cash flow impact arising from the Company's leases recorded in the
Company's consolidated statements of cash flows is detailed in the following table for the
periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
2022
|
|
2021
|
|
Cash
paid for amounts included in lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
cash flows used for operating leases |
$
|
7,049
|
|
|
$
|
6,335
|
|
|
|
|
|
|
Non-cash
transactions: |
|
|
|
|
|
|
|
|
Right-of-use
assets obtained in exchange for new operating lease liabilities |
$
|
17,513
|
|
|
$
|
—
|
|
As
of December 31, 2022, the Company expects that its future minimum lease payments will
become due and payable as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases |
|
|
|
2023
|
|
|
$
|
9,886
|
|
|
|
|
2024
|
|
|
10,304
|
|
|
|
|
2025
|
|
|
10,386
|
|
|
|
|
2026
|
|
|
9,455
|
|
|
|
|
2027
|
|
|
7,959
|
|
|
|
|
Thereafter
|
|
|
31,177
|
|
|
|
|
Total
minimum lease payments |
|
|
$
|
79,167
|
|
|
|
|
Less:
interest |
|
|
(
21,342) |
|
|
|
|
Total
lease liabilities |
|
|
$
|
57,825
|
|
|
|
As
of December 31, 2022, the Company has entered into $
37.1 million of contractually binding minimum lease payments for a lease
executed but not yet commenced. This amount is excluded from the above tables and relates to the
lease of the Flanders San Diego Facility, which consists of
two buildings (“Flanders I” and “Flanders II”).
8.
Commitments and Contingencies
Legal
Proceedings
The
Company is involved in various legal proceedings arising in the normal course of business. The Company
accrues for a loss contingency when it determines that it is probable, after consultation with counsel,
that a liability has been incurred and the amount of such loss can be reasonably estimated. The Company
believes that the results of any such contingencies, either individually or in the aggregate, will not
have a material adverse effect on the Company’s consolidated financial position, results of
operations or cash flows.
Indemnification
Agreements
In
the ordinary course of business, we may provide indemnification of varying scope and terms to vendors,
lessors, customers and other parties with respect to certain matters including, but not limited to,
losses arising out of breach of such agreements or from intellectual property infringement claims made
by third parties, and losses arising from breach of representations, warranties and covenants to
counterparties set forth in agreements with such parties. We have also agreed to our directors and
officers to the maximum extent permitted under applicable state laws pursuant to standard director and
officer indemnification agreements and our corporate charter and bylaws. The maximum potential amount of
future payments that we could be required to make under these indemnification agreements is, in many
cases, unlimited. We have not incurred any material costs as a result of such indemnifications and are
not currently aware of any indemnification claims.
9.
Long-Term Debt
Credit
Agreement
In
October 2020, Maravai Intermediate Holdings, LLC (“Intermediate”), a wholly-owned subsidiary
of Topco LLC, along with its subsidiaries Vector, TriLink and Cygnus (together with Intermediate, the
“Borrowers”), entered into a credit agreement (as amended, the “Credit
Agreement”) to refinance previously existing $
400.0 million long-term debt with a new $
780.0 million facility. The Credit Agreement provides for a $
600.0 million term loan facility, maturing October 2027 (the “Term
Loan”), and a $
180.0 million revolving credit facility (the “Revolving Credit
Facility”). The Credit Agreement amended and restated the Company’s prior credit agreement
as of August 2018 (the “First and Second Lien Credit Agreements”). In November 2020, the
Company repaid $
50.0 million of principal balance of the First Lien Term Loan using proceeds from
the IPO.
In
August 2021, in conjunction with the Company’s divestiture of the Protein Detection segment, the
Company transferred, per the existing terms of the Credit Agreement, the portion of the Term Loan held
by Vector of $
118.4 million to Intermediate in its entirety. This amount was not assumed by
the counterpart as part of the divestiture of Vector. Total outstanding debt and loan covenant
requirements remained unchanged as a result of the divestiture.
In
January 2022, the Company entered into an amendment (the “Amendment”) to the Credit
Agreement to: (i) refinance $
544.0 million in aggregate principal amount of first lien term loans initially
issued thereunder (the “First Lien Term Loan”) and to replace it with a Tranche B Term Loan
(the “Tranche B Term Loan”); (ii) replace the London Interbank Offered Rate
(“LIBOR”) based interest rate with a Term Secured Overnight Financing Rate
(“SOFR”) based rate; and (iii) reduce the interest rate margins applicable to the Term Loan
and Revolving Credit Facility under the Credit Agreement. The previous interest rate margin on the
facilities was, with respect to each LIBOR-based loan,
3.75% to
4.25% and, with respect to each base rate-based loan,
2.75% to
3.25% (depending, in each case, on consolidated first lien leverage). Following the
Amendment, the interest rate margin on the facilities is
3.00%, with respect to each Term SOFR-based loan, and
2.00%, with respect to each base rate-based loan. Further, the Amendment reduces
the base rate floor for the term loans from
2.00% to
1.50%, sets the floor for Term SOFR-based term loans at
0.50% and sets the floor for Term SOFR-based revolving loans at
0.00%. No other significant terms under the Credit Agreement were changed in
connection with the Amendment.
As
of December 31, 2022, the interest rate on the Tranche B Term Loan was
6.96% per annum.
The
Credit Agreement also provides for a $
20.0 million limit for letters of credit, which remained unused as of
December 31, 2022.
Borrowings
under the Credit Agreement are unconditionally guaranteed by Topco LLC, together with the existing and
future material domestic subsidiaries of Topco LLC (subject to certain exceptions), as specified in the
respective guaranty agreements. Borrowings under the Credit Agreement are also secured by a
first-priority lien and security interest in substantially all of the assets (subject to certain
exceptions) of existing and future material domestic subsidiaries of Topco LLC that are loan
parties.
The
accounting related to entering into the Credit Agreement in October 2020 and using the proceeds to pay
off the First and Second Lien Credit Agreements were evaluated on a creditor-by-creditor basis to
determine whether each transaction should be accounted for as a modification or extinguishment. Certain
creditors under the First and Second Lien Credit Agreements did not participate in this refinancing
transaction and ceased being creditors of the Company and the repayment of their related outstanding
debt balances has been accounted for as an extinguishment of debt. Proceeds of borrowings from new
lenders were accounted for as a new debt financing. The Company recorded a loss on extinguishment of
debt of $
7.6 million in the accompanying consolidated statements of income for the year
ended December 31, 2020. For the remainder of the creditors, this transaction was accounted for as a
modification because the present value of cash flows between the
two term loans before and after the transaction was less than 10% on a
creditor-by-creditor basis. As part of the refinancing, the Company incurred $
15.8 million of various costs, of which $
6.0 million related to an original issuance discount, and were all capitalized in
the accompanying balance sheet within long-term debt, and are subject to amortization over the term of
the refinanced debt as an adjustment to interest expense using the effective interest method.
The
accounting related to entering into the Amendment in January 2022 was evaluated on a
creditor-by-creditor basis to determine whether each transaction should be accounted for as a
modification or extinguishment. Certain creditors under the First Lien Term Loan did not participate in
this refinancing transaction, were repaid their principal and interest of $
8.5 million and ceased being creditors of the Company and the repayment of their
related outstanding debt balances has been accounted for as an extinguishment of debt. Proceeds of
borrowings from new lenders of $
8.5 million were accounted for as a new debt financing. The Company recorded a loss
on extinguishment of debt of $
0.2 million in the accompanying consolidated statements of income during the year
ended December 31, 2022. For the remainder of the creditors, this transaction was accounted for as a
modification because the change in present value of cash flows between the
two term loans before and after the transaction was less than 10% on a
creditor-by-creditor basis. As part of the refinancing, the Company incurred $
0.9 million of various costs, of which an insignificant amount was related to an
original issuance discount, and were all capitalized in the accompanying balance sheet within long-term
debt and are subject to amortization over the term of the refinanced debt as an adjustment to interest
expense using the effective interest method.
We
also incurred $
3.5 million and $
0.3 million of financing-related fees related to the Revolving Credit Facility in
connection with the debt refinancing activities in October 2020 and January 2022, respectively. As of
December 31, 2022, unamortized debt issuance costs totaled $
2.2 million and are recorded as assets within other assets on the accompanying
consolidated balance sheet as there is
no balance outstanding related to the Revolving Credit Facility.
Commencing
with the fiscal year ended December 31, 2021, and each fiscal year thereafter, the Credit Agreement
requires mandatory prepayments on the Term Loan principal upon certain excess cash flow, subject to
certain step-downs based on the Company’s first lien net leverage ratio. The excess cash flow
shall be reduced to
25% or
0% if the first lien net leverage ratio was equal to or less than
4.75:1.00 or
4.25:1.00, respectively, however, no prepayment shall be required to the extent
excess cash flow calculated for such period is equal to or less than $
10.0 million. As of December 31, 2022, our first lien net leverage ratio was
less than
4.25:1.00. Thus, a prepayment provision was not required.
The
Tranche B Term Loan became repayable in quarterly payments of $
1.4 million beginning in March 2022, with all remaining outstanding principal
due in October 2027. The Tranche B Term Loan includes prepayment provisions that allow the
Company,
at our option, to repay all or a portion of the principal amount at any time. The Revolving Credit
Facility allows the Company to repay and borrow from time to time until October 2025, at which time
all amounts borrowed must be repaid. Subject to certain exceptions and limitations, we are required to
repay borrowings under the Tranche B Term Loan and Revolving Credit Facility with the proceeds of
certain occurrences, such as the incurrence of debt, certain equity contributions and certain asset
sales or dispositions.
Accrued
interest under the Credit Agreement is payable by us (a) quarterly in arrears with respect to Base
Rate loans, (b) at the end of each interest rate period (or at each three-month interval in the
case of loans with interest periods greater than three months) with respect to Term SOFR Rate loans,
(c) on the date of any repayment or prepayment and (d) at maturity (whether by acceleration or
otherwise). An annual commitment fee is applied to the daily unutilized amount under the Revolving
Credit Facility at
0.375% per annum, with one stepdown to
0.25% per annum based on Intermediate’s first lien net leverage ratio
calculation.
The
Credit Agreement contains certain covenants, including, among other things, covenants limiting our
ability to incur or prepay certain indebtedness, pay dividends or distributions, dispose of assets,
engage in mergers and consolidations, make acquisitions or other investments and make changes to the
nature of the business. Additionally, the Credit Agreement also requires us to maintain a certain net
leverage ratio. The Company was in compliance with these covenants as of December 31, 2022.
First
and Second Lien Credit Agreements
In
August 2018, Intermediate, along with its subsidiaries, entered into a first lien credit agreement (the
“First Lien Credit Agreement”) with leading institutions for term loan borrowings (the
“First Lien Term Loan”) totaling $
250.0 million and a second lien credit agreement (the “Second Lien
Credit Agreement”) for term loan borrowings (the “Second Lien Term Loan”) totaling $
100.0 million, to refinance a combined debt agreement entered into in 2017,
including repayment of all outstanding senior secured credit facilities and senior subordinated notes
outstanding and to allow for a $
52.0 million distribution to our members. The First Lien Credit Agreement also
provided for a revolving credit facility (the “Revolving Credit Facility”) of $
50.0 million for letters of credit and loans to be used for working capital
and other general corporate financing purposes, of which $
15.0 million was drawn down in March 2020 to provide financing for the
acquisition of MockV and other operating uses. Borrowings under the First Lien Credit Agreement and the
Second Lien Credit Agreement were unconditionally guaranteed by Topco LLC and the existing and future
material domestic subsidiaries of Topco LLC (subject to certain exceptions as specified in the
respective guaranty agreements, and are secured by a lien and security interest in substantially all of
the assets of existing and future material domestic subsidiaries of Topco LLC that are loan
parties).
The
refinancing of the previous debt was accounted for as a modification and also as an extinguishment of
the related outstanding debt balances.
Borrowings
under the First Lien Credit Agreement bore interest at variable rates as defined in the respective
agreements that could be elected at our option.
Accrued
interest under the First Lien Credit Agreement was generally payable quarterly in arrears on the date of
any repayment or prepayment and at maturity. An annual commitment fee was applied to the daily
unutilized amount under the Revolving Credit Facility at
0.50% per annum, with one stepdown to
0.375% per annum based on Intermediate’s first lien net leverage ratio
calculation.
Interest
Rate Cap
In
the first quarter of 2021, the Company entered into an interest rate cap agreement to manage a portion
of its variable interest rate risk on its outstanding long-term debt. The contract, which was effective
March 31, 2021, entitles the Company to receive from the counterparty at each calendar quarter end the
amount, if any, by which a specified defined floating market rate exceeds the cap strike interest rate,
applied to the contract’s notional amount of $
415.0 million The floating rate of interest is reset at the end of each three
month period. The contract was set to expire on March 31, 2023.
In
May 2022, the Company amended the interest rate cap agreement, effective June 30, 2022, to increase the
contract’s notional amount to $
500.0 million and to extend the maturity date to January 19, 2025.
Additionally, the floating rate option changed from a LIBOR-based rate to a SOFR-based rate. Other
provisions remained unchanged as a result of the amendment. Premiums paid to amend the interest rate cap
agreement were immaterial.
The
interest rate cap agreement has not been designated as a hedging relationship and has been recognized on
the consolidated balance sheet at fair value of $
11.4 million within other assets with changes in fair value recognized within
interest expense in the consolidated statements of income.
The
Company’s long-term debt consisted of the following as of the periods presented (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2022 |
|
December
31, 2021 |
| Tranche
B Term Loan |
$
|
538,560
|
|
|
$
|
—
|
|
| First
Lien Term Loan |
—
|
|
|
544,000
|
|
| Unamortized
debt issuance costs |
(
11,123) |
|
|
(
13,409) |
|
| Total
long-term debt |
527,437
|
|
|
530,591
|
|
| Less:
current portion |
(
5,440) |
|
|
(
6,000) |
|
|
Total
long-term debt, less current portion |
$
|
521,997
|
|
|
$
|
524,591
|
|
There
were
no balances outstanding on the Company’s Revolving Credit Facility as of
December 31, 2022.
As
of December 31, 2022, the aggregate future principal maturities of the Company’s debt
obligations for each of the next five years, based on contractual due dates, were as follows (in
thousands):
|
|
|
|
|
|
| 2023
|
$
|
5,440
|
|
| 2024
|
5,440
|
|
| 2025
|
5,440
|
|
| 2026
|
5,440
|
|
| 2027
|
516,800
|
|
|
|
|
Total
long-term debt |
$
|
538,560
|
|
10.
Stockholders’ / Member’s
Equity
Initial
Public Offering
In
November 2020, the Company completed its IPO and sold
69,000,000 shares of Class A common stock at a public offering price of $
27.00 per share, inclusive of the
9,000,000 shares of Class A common stock purchased by underwriters pursuant to the
underwriters’ option to purchase additional shares at the initial public offering price, less
underwriting discounts and commissions. The Company received net proceeds from the IPO of approximately
$
1.8 billion after deducting underwriting discounts and commissions, which was used
to purchase
55,823,011 of previously-issued and
3,703,704 of newly-issued Topco LLC Units for approximately $
94.5 million.
Immediately
prior to, and in connection with, the completion of our IPO, the Company completed a series of
organizational transactions (“Organizational Transactions”), including:
•The
amendment and restatement of Topco LLC’s operating agreement (the “New LLC Operating
Agreement”) to, among other things, (i) modify Topco LLC’s capital structure by replacing
the membership interests held by Topco LLC’s existing owners with a new class of Topco LLC units
(the “LLC Units”) and (ii) appoint the Company as the sole managing member of Topco
LLC.
•Amend
and restate the Company’s certificate of incorporation to among other things, authorize the
Company to issue two classes of common stock: Class A common stock and Class B common stock.
•The
issuance of shares of the Company’s Class B common stock to Maravai Life Sciences Holdings, LLC
(“MLSH 1”) which was Topco LLC’s pre-IPO owner on a
one-to-one basis with the number of LLC Units owned; and
•The
acquisition, by merger, of two members of Topco LLC (“the Blocker Entities”), for which we
issued
28,965,664 shares of Class A common stock and paid cash of $
208.1 million as consideration (“the Blocker Mergers”). Prior to the
Organizational Transactions, Topco LLC had established a single class of common units with MLSH 1 as its
sole member. Topco LLC was authorized to issue up to
253,916,941 common units. All authorized
253,916,941
common units were issued and outstanding prior to the Organizational Transactions.
MLSH 1 as the member, was not obligated to make capital contributions to Topco LLC. Topco LLC’s
profits and losses were allocated to MLSH 1 as determined by the Board of Directors. Topco LLC’s
common units have no conversion rights, special preferences or redemption rights.
Prior
to the Organizational Transactions, a distribution was made by Topco LLC to MLSH 1 in the amount of $
88.6 million, with a subsequent distribution of $
8.2 million in December 2020, totaling $
96.7 million of distributions for the year ended December 31, 2020.
Amendment
and Restatement of Certificate of Incorporation
In
connection with the Organizational Transactions, the Company’s certificate of incorporation was
amended and restated to, among other things, provide for the (i) authorization of
500,000,000 shares of Class A common stock with a par value of $
0.01 per share; (ii) authorization of
300,000,000 shares of Class B common stock with a par value of $
0.01 per share; (iii) authorization of
50,000,000 shares of preferred stock with a par value of $
0.01 per share.
Holders
of Class A and Class B common stock are entitled to
one
vote per share. Except as otherwise required in the Certificate of Incorporation or by
applicable law, the holders of Class A common stock and Class B common stock shall vote together as a
single class on all matters on which stockholders are generally entitled to vote. Holders of the Class A
common stock are entitled to receive dividends, and upon the Company’s dissolution or liquidation,
after payment in full of all amounts required to be paid to creditors and to the holders of preferred
stock having liquidation preferences, if any, the holders of shares of Class A common stock will be
entitled to receive the Company’s pro rata remaining assets available for distribution. Holders of
Maravai’s Class B common stock are not entitled to receive dividends and will not be entitled to
receive any distributions upon dissolution or liquidation of Maravai. Holders of Class A and Class B
common stock do not have preemptive or subscription rights. As of December 31, 2022, no preferred
stock was outstanding.
We
are required to, at all times, maintain (i) a
one-to-one ratio between the number of shares of Class A common stock outstanding
and the number of LLC Units owned by us and (ii) a
one-to-one ratio between the number of shares of Class B common stock owned by the
MLSH 1 and the number of LLC Units owned by the MLSH 1. We may issue shares of Class B common stock only
to the extent necessary to maintain these ratios. Shares of Class B common stock are transferable only
together with an equal number of LLC Units if we, at the election of MLSH 1, exchange LLC Units for
shares of Class A common stock. All Class B common stock that is transferred shall be automatically
retired and cancelled and shall no longer be outstanding.
In
November 2020, we received $
1.7 million from MLSH 1 for the issuance of
168,654,981 shares of Class B common stock.
Recapitalization
of Topco LLC
Topco
LLC’s Board of Directors adopted the amended and restated Topco LLC’s operating agreement in
November 2020 to, among other things, appoint us as Topco LLC’s sole managing member and to
provide that Topco LLC’s members would not have voting rights or any other control or authority
over Topco LLC or its business. The amended and restated operating agreement also revised the tax rate
applicable to the tax distributions that Topco LLC is required to make to the holders of LLC Units,
including us, as described in Note 14.
Blocker
Mergers
Pursuant
to the Blocker Mergers, we acquired the Blocker Entities (together with
37,119,801 LLC Units held by the Blocker Entities), by merger, from MLSH 2. We
issued an aggregate of
28,965,664 shares of Class A common stock and paid $
208.1 million in cash to MLSH 2 in consideration of the Blocker Mergers. Upon
consummation of the Blocker Mergers, we recognized the acquired LLC Units at carrying value, as these
transactions are considered to be between entities under common control. There were no tax attributes
acquired from the Blocker Entities as they had been fully utilized prior to the mergers.
Repurchase
of Class A Common Stock From MLSH 2
In
November 2020, we repurchased
1,319,148 shares of Class A common stock from MLSH 2, a related party, for $
33.7 million. These shares were immediately retired.
Exchanges
and Secondary Offerings
April
2021 Exchange and Secondary Offering
In
April 2021, MLSH 1 executed an exchange of
17,665,959 LLC Units (paired with the corresponding shares of Class B common stock)
in return for
17,665,959 shares of the Company’s Class A common stock. The corresponding
shares of Class B common stock were subsequently cancelled and retired. The Company immediately
completed a secondary offering (“April 2021 Secondary Offering”) of
20,700,000 shares of its Class A common stock by MLSH 1 and MLSH 2, which included
3,034,041 shares of Class A common stock previously held by MLSH 2, which included
the full exercise of the underwriters’ option to purchase up to
2,700,000 additional shares of Class A common stock, at a price of $
31.25 per share.
The
selling stockholders were responsible for the underwriting discounts and commissions of the April 2021
Secondary Offering and received all of the net proceeds of $
624.2 million from the sale of shares of Class A common stock. The Company was
responsible for the offering costs associated with the April 2021 Secondary Offering of $
1.0 million which were recorded within selling, general and administrative expenses
in the consolidated statements of income.
September
2021 Exchange and Secondary Offering
In
September 2021, MLSH 1 executed an exchange of
17,068,559 LLC Units (paired with the corresponding shares of Class B common stock)
in return for
17,068,559 shares of the Company’s Class A common stock. The corresponding
shares of Class B common stock were subsequently cancelled and retired. Shortly after the exchange, the
Company completed a secondary offering (“September 2021 Secondary Offering”) of
20,000,000 shares of its Class A common stock by MLSH 1 and MLSH 2, which included
2,931,441 shares of Class A common stock previously held by MLSH 2 at a price of $
50.00 per share.
The
selling stockholders were responsible for the underwriting discounts and commissions of the September
2021 Secondary Offering and received all of the net proceeds of $
977.5 million from the sale of shares of Class A common stock. The Company was
responsible for the offering costs associated with the September 2021 Secondary Offering of $
0.9 million which were recorded within selling, general and administrative expenses
in the consolidated statements of income.
Cash
Contribution, Exchange, and Forfeiture Agreement
In
December 2021, the Company entered into a Cash Contribution, Exchange and Forfeiture Agreement (the
“Contribution Agreement”) with Topco LLC and MLSH 1, a related party. Pursuant to the
Contribution Agreement, the Company contributed $
110.0 million of cash to Topco LLC in exchange for
2,732,919 newly-issued units LLC Units of Topco LLC at a price per unit of $
40.25, which was equal to the 50-day volume-weighted average price of the
Company’s Class A common stock as calculated on December 31, 2021. Immediately following the
contribution, the Company and MLSH 1 agreed to forfeit
2.036% of their respective LLC Units of Topco LLC and an equal number of shares of
the Company’s Class B common stock, par value $
0.01 per share, for no consideration. The purpose of the Contribution Agreement was
to reduce the excess cash that had accumulated at the Company as a result of quarterly tax distributions
it has received from Topco LLC since its IPO.
11.
Net Income Per Class A Common Share/Unit
Attributable to Maravai LifeSciences Holdings, Inc.
Net
income per unit for periods prior to our IPO have not been retrospectively adjusted to give effect to
the Organizational Transactions described in Note 10 and the
69,000,000 shares of Class A common stock sold in our IPO. Additionally, basic net
income per Class A common stock for the year ended December 31, 2020, has been calculated by dividing
net income for the period, adjusted for preferred unit dividends attributable to MLSC non-controlling
interests and net income (loss) attributable to non-controlling interests, by the weighted average Class
A common stock outstanding during the period. Basic net income per Class A common stock for the years
ended December 31, 2022 and 2021, have been calculated by dividing net income for the period,
adjusted for net income attributable to non-controlling interests, by the weighted average Class A
common stock outstanding during the period. Diluted net income per Class A common share/unit gives
effect to potentially dilutive securities by application of the treasury stock method or if-converted
method, as applicable. Diluted net income per share of Class A common stock attributable to the Company
is computed by adjusting the net income and the weighted-average number of shares of Class A common
stock outstanding to give effect to potentially diluted securities.
Prior
to the Organizational Transactions, the members’ equity of MLSC was comprised of Class A and Class
B preferred units, MLSC Incentive Units and MLSC common units, each with participation rights. The MLSC
preferred units were entitled to cumulative dividends of
8.0% compounded annually, up to an additional
4.0%, also compounded annually, to the extent of remaining unallocated earnings.
The preferred unitholders of MLSC were required, however, to share a portion of the additional
4.0% in dividends with the holders of MLSC Incentive Units based on a formula
defined in the MLSC LLC Agreement. The Company determined that vested MLSC Incentive Units and MLSC
Class A and B preferred units were participating securities under the two-class method at the MLSC
subsidiary level, however, they do not have a contractual obligation to share in losses, and therefore
no undistributed losses have been allocated to them. MLSH 1 Incentive Units are granted by the parent of
the Company, and as a result, do not represent potential common units of the Company.
In
September 2020, the Company entered into a Sale and Rollover Agreement and repurchased a majority of the
outstanding MLSC Class B preferred units as well as entering into an agreement that resulted in an
exchange of the remaining MLSC Class B preferred units and MLSC common units into
69,599 of MLSH 1 common units in November 2020 upon the IPO. Included in the
preferred unit dividends attributable to non-controlling interests line item for the year ended December
31, 2020, is a $
10.2 million deemed dividend representing the excess of the fair value of the Class
B preferred units, determined as of the date of the Sale and Rollover Agreement, over their related
carrying value. In September 2020, the Company also agreed and subsequently repurchased all MLSC
Incentive Units, however, such incentive units remained outstanding until October 2020, and had the
potential to be dilutive to earnings per unit until they were repurchased.
The
following table presents the computation of basic and diluted net income per common share/unit
attributable to the Company for the periods presented (in thousands, except per share and per unit
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
2022
|
|
2021
|
|
2020
|
| Numerator:
|
|
|
|
|
|
| Net
income |
$
|
490,663
|
|
|
$
|
469,250
|
|
|
$
|
78,816
|
|
| Less:
preferred unit dividends attributable to the MLSC non-controlling interests |
—
|
|
|
—
|
|
|
(
15,270) |
|
| Less:
(income) loss attributable to common non-controlling interests |
(
270,458) |
|
|
(
287,213) |
|
|
13,342
|
|
| Net
income attributable to Maravai LifeSciences Holdings, Inc.—basic |
220,205
|
|
|
182,037
|
|
|
76,888
|
|
| Net
income (loss) effect of dilutive securities: |
|
|
|
|
|
|
Effect
of dilutive employee stock purchase plan, RSUs and options |
$
|
87
|
|
|
132
|
|
|
—
|
|
|
Effect
of the assumed conversion of Class B common stock |
205,984
|
|
|
220,187
|
|
|
(
8,802) |
|
| Net
income attributable to Maravai LifeSciences Holdings, Inc.—diluted |
$
|
426,276
|
|
|
$
|
402,356
|
|
|
$
|
68,086
|
|
|
|
|
|
|
|
| Denominator:
|
|
|
|
|
|
| Weighted
average Class A common shares/units outstanding—basic |
131,545
|
|
|
114,791
|
|
|
10,351
|
|
| Weighted
average effect of dilutive securities: |
|
|
|
|
|
|
Effect
of dilutive employee stock purchase plan, RSUs and options |
109
|
|
|
153
|
|
|
1
|
|
|
Effect
of the assumed conversion of Class B common stock |
123,669
|
|
|
142,859
|
|
|
18,556
|
|
| Weighted
average Class A common shares/units outstanding—diluted |
255,323
|
|
|
257,803
|
|
|
28,908
|
|
|
|
|
|
|
|
| Net
income per Class A common share/unit attributable to Maravai LifeSciences Holdings,
Inc.: |
|
|
|
|
|
| Basic
|
$
|
1.67
|
|
|
$
|
1.59
|
|
|
$
|
7.43
|
|
| Diluted
|
$
|
1.67
|
|
|
$
|
1.56
|
|
|
$
|
2.36
|
|
Shares
of Class B common stock do not share in the earnings or losses of the Company, and are therefore not
participating securities. As such, a separate presentation of basic and diluted net income per share for
Class B common stock under the two-class method has not been presented.
The
following table presents potentially dilutive securities excluded from the computation of diluted
net income per share/unit for the periods presented because their effect would have been
anti-dilutive for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
2022
|
|
2021
|
|
2020
|
|
|
|
|
|
|
| Restricted
stock units |
74
|
|
|
—
|
|
|
—
|
|
| Stock
options |
2,769
|
|
|
355
|
|
|
1,535
|
|
| Shares
estimated to be purchased under employee stock purchase plan |
13
|
|
|
12
|
|
|
51
|
|
|
|
|
|
|
|
|
Total
|
2,856
|
|
|
367
|
|
|
1,586
|
|
Shares
underlying contingently issuable awards that have not met the necessary conditions as of the end of a
reporting period are not included in the calculation of diluted net income per share of Class A common
stock attributable to the Company for that period. The Company had contingently issuable PSUs
outstanding that did not meet the market conditions as of December 31, 2022 and, therefore, were
excluded from the calculation of diluted net income per share of Class A common stock attributable to
the Company. The maximum number of potentially dilutive shares that could be issued upon vesting for
such awards was insignificant as of December 31, 2022. These amounts were also excluded from the
potentially dilutive securities in the table above. The Company had no contingently issuable PSUs
outstanding as of December 31, 2021 or 2020.
12.
Equity Incentive Plans
Stock-Based
Compensation
In
November 2020, the Company’s board of directors adopted the 2020 Omnibus Incentive Plan (the
“2020 Plan”). The 2020 Plan provides for an automatic increase in the number of shares
reserved for issuance thereunder on January 1 of each of the first
10 calendar years during the term of the 2020 Plan, by the lesser of (i)
4% of the total number of shares of Class A common stock outstanding on each
December 31 immediately prior to the date of increase or (ii) such number of shares of Class A common
stock determined by our board of directors or compensation committee. Shares of Class A common stock
subject to an award that expires or is cancelled, forfeited, exchanged, settled in cash or otherwise
terminated without delivery of shares and shares withheld to pay the exercise price of, or to satisfy
the withholding obligations with respect to, an award will again be available for delivery pursuant to
other awards under the 2020 Plan.
All
awards granted under the 2020 Plan are intended to be treated as (i) stock options, including incentive
stock options (“ISOs”), (ii) stock appreciation rights (“SARs”), (iii)
restricted share awards (“RSAs”), (iv) restricted stock units (“RSUs”), (v)
performance awards, (vi) dividend equivalents, or (vii) other stock or cash awards as may be determined
by the plan’s administrator from time to time. The term of each option award shall be no more than
10 years from the date of grant. The exercise price of a stock option shall not be
less than
100% (or, in the case of an ISO granted to a ten percent stockholder,
110%) of the fair market value of the shares on the date of grant. As of
December 31, 2022, only stock options, RSUs and PSUs have been issued.
In
November 2020, the Company adopted the 2020 Employee Stock Purchase Plan (the “ESPP”) to
assist employees in acquiring a stock ownership interest in the Company and to encourage them to remain
in the employment of the Company. The ESPP permits eligible employees to purchase shares of Class A
common stock at a discount through payroll deductions during specified
six-month purchase periods. The price of shares purchased under the ESPP is equal to
the lower of the grant date price less a
15% discount or a
15% discount to the market closing price on the date of purchase.
Compensation
expense recognized for the ESPP was insignificant for all periods presented.
In
October 2022, the Company issued PSUs to an executive employee under the 2020 Plan. The PSUs vest only
if the executive employee satisfies a service-based vesting condition and market condition. The
executive employee must remain employed through the third anniversary of the grant date. The award is
eligible to vest based on the achievement of certain price targets of the Company’s stock price
over a defined performance period.
Compensation
expense recognized for these PSUs was insignificant for the year ended December 31, 2022. There was
no
compensation expense related to PSUs during the years ended December 31, 2021 or
2020.
Stock
Options
The
following table summarizes information related to stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Stock Options (in thousands) |
|
Weighted
Average Exercise Price per Stock Option |
|
Weighted
Average Remaining Contractual Life (in years) |
|
Aggregate
Intrinsic Value (in thousands) |
| Outstanding
as of December 31, 2021 |
1,409
|
|
|
$
|
30.47
|
|
|
9.0
|
|
$
|
16,846
|
|
|
Granted
|
1,709
|
|
|
23.81
|
|
|
|
|
|
|
Exercised
|
(
4) |
|
|
26.08
|
|
|
|
|
|
|
Cancelled
|
(
221) |
|
|
31.64
|
|
|
|
|
|
| Outstanding
as of December 31, 2022 |
2,893
|
|
|
$
|
26.45
|
|
|
8.9
|
|
$
|
—
|
|
| Exercisable
as of December 31, 2022 |
726
|
|
|
$
|
28.75
|
|
|
8.2
|
|
$
|
—
|
|
The
Company uses the Black-Scholes option pricing model to estimate the fair value of each option grant on
the date of grant or any other measurement date. The assumptions and estimates are as follows:
•Expected
term
- The expected term represents the period that stock-based awards are expected to be outstanding. Our
historical share option exercise information is limited due to a lack of sufficient data points and does
not provide a reasonable basis upon which to estimate an expected term.
•Expected
volatility
- The expected volatility was derived from the historical stock volatilities of peer public companies
within our industry that are considered to be comparable to our business over a period equivalent to the
expected term of the stock-based awards, since our stock trading history is limited.
•Risk-free
interest rate
- The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant
for zero-coupon U.S. Treasury notes with maturities approximately equal to the stock-based awards’
expected term.
•Expected
dividend yield
- The expected dividend yield is
zero as we have no plans to make dividend payments.
A
summary of the assumptions used to estimate the fair value of stock option grants for the years
presented is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
2022
|
|
2021
|
|
2020
|
| Expected
volatility |
51.3
|
%
|
|
57.2
|
%
|
|
59.0
|
%
|
| Risk-free
interest rate |
2.8
|
%
|
|
1.0
|
%
|
|
0.5
|
%
|
| Expected
term (in years) |
6.1
|
|
6.1
|
|
6.1
|
| Expected
dividend yield |
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Stock-based
compensation expense related to stock options was $
8.1 million, $
4.6 million and $
0.6 million for the years ended December 31, 2022, 2021 and 2020,
respectively. The total fair value of stock options vested was $
7.7 million and $
4.3 million for the years ended December 31, 2022 and 2021,
respectively.
As
of December 31, 2022, the total unrecognized stock-based compensation related to stock options was
$
27.7 million, which is expected be recognized over a weighted-average period of
approximately
3.0 years.
Restricted
Stock Units
The
Company has granted restricted stock unit awards to employees and non-employee directors. The
following table summarizes information related to RSUs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Units (in thousands) |
|
Weighted
Average Fair Value per RSU at Grant Date |
| Balance
as of December 31, 2021 |
90
|
|
|
$
|
31.96
|
|
|
Granted
|
1,375
|
|
|
23.99
|
|
|
Vested
|
(
69) |
|
|
33.25
|
|
|
Forfeited
|
(
65) |
|
|
27.30
|
|
| Balance
as of December 31, 2022 |
1,331
|
|
|
$
|
21.04
|
|
Stock-based
compensation expense related to RSUs was $
8.2 million, $
0.8 million and $
0.1 million for the years ended December 31, 2022, 2021 and 2020,
respectively. The total fair value of RSUs vested was $
1.0 million and $
0.9 million for the years ended December 31, 2022 and 2021,
respectively.
As
of December 31, 2022, the total unrecognized equity-based compensation related to RSUs was $
25.7 million, which is expected be recognized over a weighted-average period of
approximately
2.4 years.
Unit-Based
Compensation
Prior
to the IPO, the Company’s parent, MLSH 1, granted unit-based awards (“MLSH 1 Incentive
Units”) to certain executives of the Company in the form of non-vested units. Our controlled
subsidiary, MLSC, granted unit-based awards (“MLSC Incentive Units”) only to certain
employees of its subsidiaries.
MLSC
Incentive Units
Topco
LLC’s majority-owned subsidiary during the periods preceding the Organizational Transactions and
wholly-owned subsidiary subsequent to the Organizational Transactions, issued incentive units (the
“MLSC Incentive Units”) to its employees. All MLSC Incentive Units were settled during 2020.
The MLSC Incentive Units were subject to either a combination of service, market or performance vesting
conditions. Vested MLSC Incentive Units were treated as common units for purposes of
distributions.
In
September 2020, Topco LLC entered into agreements (the “Repurchase Agreements”) to
repurchase all remaining and outstanding MLSC Incentive Units, including the
1,500,000 MLSC Incentive Units, accelerated the vesting of all remaining unvested
time-based MLSC Incentive Units and also removed the performance condition associated with the
performance-based MLSC Incentive Units. The total compensation cost recognized for these transactions
approximated $
0.8 million. Topco LLC paid $
9.1 million to settle the Repurchase Agreements in October 2020.
Unit-based
compensation expense related to MLSC Incentive Unit awards was approximately $
1.5 million for the year ended December 31, 2020. The total fair value of the MLSC
Incentive Units vested was $
0.9 million for the year ended December 31, 2020.
MLSH
1 Incentive Units
Prior
to the Organizational Transactions, Topco LLC entered into agreements with certain executives and board
members whereby those employees and board members were granted incentive units in MLSH 1, a related
party. All MLSH 1 Incentive Unit awards were subject to a market condition which is subject to the
achievement of a certain investment return threshold that increased on a compounding basis annually and
a service condition subject to their continued employment. Certain MLSH 1 Incentive Unit awards
contained a performance condition tied to the achievement of certain cash distribution multiples. All
vested MLSH 1 Incentive Unit awards are subject to repurchase for fair value at MLSH 1’s option
upon a voluntary or involuntary separation event that is not deemed to be for cause. Upon the IPO, the
performance condition was met for certain MLSH 1 Incentive Units and the Company recorded an additional
$
3.5 million of equity-based compensation expense.
The
MLSH 1 Incentive Unit awards that include market and service conditions provide for cliff-vesting
generally over four
or
five years. The MLSH 1 Incentive Unit awards that include market and performance
conditions provide for full vesting upon meeting the performance condition. The fair value of MLSH 1
Incentive Unit awards was measured at the grant date and recognized as expense over the requisite
service period for the awards.
In
November 2020, and before the IPO, MLSH 1 Incentive Unit awards were modified to allow for vesting
subsequent to the termination of the employment for two employees (i.e. improbable-probable
modification). The calculation of the incremental equity-based compensation expense was based on the new
fair value of the award measured as of the date of modification. As a result of the modification and
based on the performance condition being satisfied, the Company recognized an incremental equity-based
compensation expense of $
16.7 million for the year ended December 31, 2020.
In
connection with the divestiture of its Protein Detection business, the Company recognized incremental
unit-based compensation expense of $
2.4 million related to an amended agreement with an executive of Vector (see Note
2). This unit-based compensation expense was recorded within selling, general and administrative
expenses in the consolidated statements of income for the year ended December 31, 2021.
Unit-based
compensation expense related to MLSH 1 Incentive Unit awards was approximately $
0.7 million, $
3.9 million and $
22.3 million for the years ended December 31, 2022, 2021 and 2020,
respectively.
MLSH
1 Incentive Unit award activity during year ended December 31, 2022 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Unvested MLSH 1 Incentive Units (in thousands) |
|
Weighted
Average Grant Date Fair Value Per Unit |
| Balance
as of December 31, 2021 |
159
|
|
|
$
|
22.20
|
|
|
Forfeited
|
(
6) |
|
|
17.44
|
|
|
Vested
|
(
76) |
|
|
20.39
|
|
| Balance
as of December 31, 2022 |
77
|
|
|
$
|
24.34
|
|
As
of December 31, 2022, total unrecognized compensation cost related to unvested MLSH 1 Incentive
Units subject to service condition is $
0.5 million which is expected to be recognized over a weighted average period of
1.6 years.
Equity-Based
Compensation
The
following table summarizes the total equity-based compensation expense included in the
Company’s consolidated statements of income for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
2022
|
|
2021
|
|
2020
|
| Cost
of sales |
$
|
4,192
|
|
|
$
|
1,915
|
|
|
$
|
282
|
|
| Selling,
general and administrative |
13,349
|
|
|
8,263
|
|
|
24,216
|
|
| Research
and development |
1,129
|
|
|
280
|
|
|
131
|
|
|
Total
equity-based compensation |
$
|
18,670
|
|
|
$
|
10,458
|
|
|
$
|
24,629
|
|
13.
Repurchase of Non-Controlling Interests
In
September 2020, Topco LLC and MLSH 1 entered into a Sale and Rollover Agreement with the President of
Cygnus Technologies and his affiliated entity (collectively, the “Investors”) to purchase
43,264 MLSC Class B preferred units and
18,387,206 MLSC common units held by the Investors for approximately $
120.0 million. In October 2020, Topco LLC repurchased $
120.0 million of the MLSC Class B preferred and common units for cash. In addition,
the Sale and Rollover Agreement provided that the remaining
16,736 MLSC Class B preferred units and
7,112,794 MLSC common units held by the Investors were exchanged upon the IPO into
MLSH 1 common units for $
46.6 million (the “Exchange”). In November 2020, and before the IPO,
MLSH 1 exchanged its MLSH 1 common units for the remaining MLSC Class B preferred and common units and
contributed the MLSC Class B preferred and common units to Topco LLC in a common control transaction.
The difference between the consideration to be paid to the Investors associated with the non-controlling
interests of $
166.4 million and the carrying amount of the non-controlling interests in MLSC of $
4.8 million was recorded, in the activity prior to the IPO and related
Organizational Transactions, as a $
161.6 million reduction in member’s equity in the consolidated statements of
stockholders’/member’s equity.
In
November 2020, the MLSC LLC Agreement was amended and restated to recapitalize the outstanding equity
into
1,000 common units.
14.
Income Taxes
As
of December 31, 2022 and 2021, we are subject to U.S. federal and state income taxes with respect
to our allocable share of any taxable income or loss of Topco LLC, as well as any stand-alone income or
loss we generate. Topco LLC is organized as a limited liability company and treated as a partnership for
federal tax purposes and generally does not pay income taxes on its taxable income in most
jurisdictions. Instead, Topco LLC’s taxable income or loss is passed through to its members,
including us.
Components
of income from continuing operations before income taxes for the periods presented were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
2022
|
|
2021
|
|
2020
|
| U.S.
|
$
|
551,472
|
|
|
$
|
530,853
|
|
|
$
|
82,012
|
|
| International
|
—
|
|
|
(
88) |
|
|
(
316) |
|
|
Total
income from continuing operations |
$
|
551,472
|
|
|
$
|
530,765
|
|
|
$
|
81,696
|
|
Income
tax expense (benefit) consisted of the following for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
2022
|
|
2021
|
|
2020
|
| Current
tax expense |
|
|
|
|
|
|
Federal
|
$
|
16,312
|
|
|
$
|
9,291
|
|
|
$
|
6,093
|
|
|
State
and local |
2,173
|
|
|
1,623
|
|
|
2,251
|
|
|
International
|
6
|
|
|
3,697
|
|
|
—
|
|
|
Total
current tax expense |
18,491
|
|
|
14,611
|
|
|
8,344
|
|
|
|
|
|
|
|
| Deferred
tax expense (benefit) |
|
|
|
|
|
|
Federal
|
$
|
39,924
|
|
|
$
|
36,564
|
|
|
$
|
(
3,922) |
|
|
State
and local |
2,394
|
|
|
10,340
|
|
|
(
1,542) |
|
|
|
|
|
|
|
|
Total
deferred tax expense (benefit) |
42,318
|
|
|
46,904
|
|
|
(
5,464) |
|
|
|
|
|
|
|
|
Total
provision for income taxes |
$
|
60,809
|
|
|
$
|
61,515
|
|
|
$
|
2,880
|
|
A
reconciliation between the Company’s effective tax rate and the applicable U.S. federal
statutory income tax rate as of the periods presented is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2022 |
|
December
31, 2021 |
|
December
31, 2020 |
| Federal
statutory rate |
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
| State
and local taxes, net of federal benefits |
0.6
|
|
|
2.2
|
|
|
0.3
|
|
| Deferred
tax revaluation |
0.3
|
|
|
—
|
|
|
(
1.8) |
|
| Income
of non-controlling interest |
(
10.3) |
|
|
(
11.4) |
|
|
(
18.9) |
|
|
|
|
|
|
|
| Taxable
(loss) gain on subsidiary liquidation |
—
|
|
|
(
0.7) |
|
|
2.7
|
|
| Equity-based
compensation |
—
|
|
|
0.1
|
|
|
1.3
|
|
| Research
and development credits |
(
0.1) |
|
|
(
0.4) |
|
|
(
0.1) |
|
|
|
|
|
|
|
| Valuation
allowance |
0.1
|
|
|
0.1
|
|
|
(
1.5) |
|
| Other
|
(
0.6) |
|
|
0.7
|
|
|
0.5
|
|
|
Effective
tax rate |
11.0
|
%
|
|
11.6
|
%
|
|
3.5
|
%
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes
and operating loss and tax credit carryforwards. Significant items comprising the net deferred tax
assets were as follows as of the periods presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2022 |
|
December
31, 2021 |
| Deferred
tax assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in Topco LLC |
$
|
636,498
|
|
$
|
675,855
|
|
Deductions
to be received for the Tax Receivable Agreement payments |
148,681
|
|
154,093
|
|
Capital
loss carryforward |
3,265
|
|
—
|
|
Other
|
1,131
|
|
1,249
|
| Total
deferred tax assets |
789,575
|
|
831,197
|
|
Valuation
allowance |
(
23,776) |
|
(
23,080) |
| Total
deferred tax assets, net of valuation allowance |
$
|
765,799
|
|
$
|
808,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a result of the Organizational Transactions, IPO, and subsequent exchanges and financing, we acquired
LLC Units and recognized a deferred tax asset for the difference between the financial reporting and tax
basis of our investment in Topco LLC which included net deferred tax assets of $
765.8 million primarily associated with: (i) $
636.5 million related to temporary differences in the book basis as compared to the
tax basis of our Company’s investment in Topco LLC and (ii) $
148.7 million
related
to tax benefits from future deductions attributable to payments under the TRA, (iii) $
3.3 million related to capital loss carryforwards generated during the sale of
Vector, and (iv) $
23.8 million valuation allowance on these items.
The
valuation allowance increased by $
0.7 million and $
9.4 million during the years ended December 31, 2022 and 2021, respectively.
The
realizability of the Company’s deferred tax asset related to its investment in Topco LLC depends
on the Company receiving allocations of tax deductions for its tax basis in the investment and on the
Company generating sufficient taxable income to fully offset such deductions. We believe it is more
likely than not that the Company will generate sufficient taxable income in the future to fully realize
any deductions allocated to it from Topco LLC associated with the reversal of its tax basis as of
December 31, 2022. However, a portion of the deferred tax asset may only be realizable through the
sale or liquidation of the investment and our ability to generate sufficient capital gains. Therefore,
the change in the valuation allowance during December 31, 2022 is primarily due to an increase to
reflect the deferred tax asset that is more likely than not to not be realized.
Net
operating loss (“NOL”) and tax credit carryforwards as of December 31, 2022
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Expiration
Years |
|
Capital
loss carryforward |
$
|
3.3
|
|
|
2026
|
|
|
|
|
|
|
|
|
|
Tax
credits, state |
$
|
0.1
|
|
|
CA
- Do not expire |
As
of December 31, 2022 and 2021, the Company had $
6.3 million and $
0.2 million of unrecognized tax benefits, all of which would affect the effective
tax rate if recognized. The Company expects our unrecognized tax benefits may decrease by $
1.9 million in the next twelve months due to statute expiration. The Company
recognizes interest related to uncertain tax benefits as a component of income tax expense, including $
1.0 million recognized during the year ended December 31, 2022.
The
aggregate changes in the balance of the Company’s unrecognized tax benefits were as follows
for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
2022
|
|
2021
|
|
2020
|
| Balance,
beginning of year |
$
|
241
|
|
$
|
220
|
|
$
|
208
|
|
Gross
increases based on tax positions related to current year |
130
|
|
232
|
|
62
|
|
Gross
increases based on tax positions related to prior years |
6,775
|
|
—
|
|
—
|
|
Gross
decreases based on tax positions related to prior years |
(
889) |
|
(
211) |
|
(
50) |
| Balance,
end of year |
$
|
6,257
|
|
$
|
241
|
|
$
|
220
|
The
Company files income tax returns in the U.S. federal jurisdiction and various states. The Company
received a notification on November 2, 2022 from the Internal Revenue Service (“IRS”)
informing us of initiated administrative proceedings (audit) of Maravai Life Sciences Holdings,
LLC’s 2020 tax year. We do not have any further information or communication from the taxing
authorities with regards to their requests at this time. The Company is no longer subject to U.S.
federal, state, and local, or non-U.S. income tax examinations for years before 2018.
Payable
to Related Parties Pursuant to the Tax Receivable Agreement
We
are a party to a TRA with MLSH 1 and MLSH 2. The TRA provides for the payment by us to MLSH 1 and MLSH
2, collectively, of
85% of the amount of certain tax benefits, if any, that we actually realize, or in
some circumstances are deemed to realize, as a result of the Organizational Transactions, IPO and any
subsequent purchases or exchanges of LLC Units of Topco LLC. Based on our current projections of taxable
income, and before deduction of any specially allocated depreciation and amortization, we anticipate
having enough taxable income to utilize most of these tax benefits.
As
of December 31, 2022, our liability under the TRA is $
718.2 million, payable to MLSH 1 and MLSH 2, representing approximately
85% of the calculated tax savings we anticipate being able to utilize in future
years. During the year ended December 31, 2022, the Company recognized a loss of $
4.1 million on TRA liability adjustment primarily due to changes in our estimated
state apportionment and the corresponding change of our estimated state tax rate.
We
made payments of $
35.3 million to MLSH 1 and MLSH 2 pursuant to the TRA during the year ended
December 31, 2022, of which $
1.1 million is related to interest. We made payments of $
1.3 million to MLSH 1 and MLSH 2 pursuant to the TRA during the year ended
December 31, 2021.
No payments were made during the year ended December 31, 2020. As of
December 31, 2022 and 2021, our liabilities under the TRA were $
718.2 million and $
748.3 million, respectively.
Tax
Distributions to Topco LLC’s Owners
Topco
LLC is subject to an operating agreement put in place at the date of the Organizational Transactions
(“LLC Operating Agreement”). The LLC Operating Agreement has numerous provisions related to
allocations of income and loss, as well as timing and amounts of distributions to its owners. This
agreement also includes a provision requiring cash distributions enabling its owners to pay their taxes
on income passing through from Topco LLC. These tax distributions are computed based on an assumed
income tax rate equal to the sum of (i) the maximum combined marginal federal and state income tax rate
applicable to an individual and (ii) the net investment income tax. The assumed income tax rate ranges
from
46.7% to
54.1% in certain cases where the qualified business income deduction is
unavailable.
In
addition, under the tax rules, Topco LLC is required to allocate taxable income disproportionately to
its unit holders. Because tax distributions are determined based on the holder of LLC Units who is
allocated the largest amount of taxable income on a per unit basis, but are made pro rata based on
ownership, Topco LLC is required to make tax distributions that, in the aggregate, will likely exceed
the amount of taxes Topco LLC would have otherwise paid if it were taxed on its taxable income at the
assumed income tax rate. Topco LLC is subject to entity level taxation in certain states and certain of
its subsidiaries are subject to entity level U.S. and foreign income taxes. As a result, the
accompanying consolidated statements of income include income tax expense related to those states and to
U.S. and foreign jurisdictions where Topco LLC or any of our subsidiaries are subject to income
tax.
During
the year ended December 31, 2022, Topco LLC paid tax distributions of $
310.0 million to its owners, including $
159.8 million to us. During the year ended December 31, 2021, Topco LLC paid
tax distributions of $
283.2 million to its owners, including $
129.7 million to us. During the year ended December 31, 2020, Topco LLC paid
tax distributions of $
13.1 million to its owners, including $
4.9 million to us.
As
of December 31, 2022,
no amounts for tax distributions have been accrued as such payments were made
during the period.
15.
Employee Benefit Plans
The
Company sponsors a 401(k) plan (the “Maravai LifeSciences 401(k) Plan”) pursuant to which
eligible employees can elect to contribute to the 401(k) Plan, subject to certain limitations, on a
pretax basis. The Company provides for a cash match of up to
50% of employee contributions up to the first
6% of salary.
Total
contributions by the Company to the Maravai LifeSciences 401(k) Plan was approximately $
1.6 million, $
1.3 million and $
1.0 million for the years ended December 31, 2022, 2021 and 2020,
respectively.
16.
Related Party Transactions
MLSH
1’s majority owner is GTCR, LLC (“GTCR”). The Company’s Executive Chairman of
the Board, Chief Financial Officer (“CFO”) and General Counsel are executives of MLSH 1 and
MLSH 2.
Advisory
and Services Agreement with GTCR
Prior
to the IPO, GTCR provided subsidiaries of the Company with financial and management consulting services
through an advisory services agreement. This advisory services agreement also provided that the Company
pay placement fees to GTCR of
1.0% of the gross amount of any debt or equity financings as well as quarterly
management fees. The advisory services agreement was terminated in connection with the IPO. The Company
also reimburses GTCR for out-of-pocket expenses incurred while providing the above professional
services. During the year ended December 31, 2020, the Company entered into the Credit Agreement (see
Note 9) and paid GTCR a $
3.7 million placement fee. For the year ended December 31, 2020, the Company
incurred approximately $
4.2 million in management fees to GTCR. All other amounts paid or payable under
these agreements to GTCR were insignificant for all periods presented.
Director
Nomination Agreement with GTCR
In
connection with the IPO, the Company entered into a Director Nomination Agreement with GTCR. The
Director Nomination Agreement provides GTCR the right to nominate to the Board a number of designees
equal to at least: (i)
100% of the total number of directors comprising the Board, so long as GTCR
beneficially owns shares of Class A common stock and Class B common stock representing at least
40% of the total amount of shares of Class A common stock and Class B common stock
it owns, (ii)
40% of the total number of directors, in the event that GTCR beneficially owns
shares of Class A common stock and Class B common stock representing at least
30% but less than
40% of the total amount of shares of Class A common stock and Class B common stock
it owns, (iii)
30% of the total number of directors, in the event that GTCR beneficially owns
shares of Class A common stock and Class B common stock representing at least
20% but less than
30% of the total amount of shares of Class A common stock and Class B common stock
it owns, (iv)
20% of the total number of directors, in the event that GTCR
beneficially
owns shares of Class A common stock and Class B common stock representing at least
10% but less than
20% of the total amount of shares of Class A common stock and Class B common stock
it owns and (v)
one director, in the event that GTCR beneficially owns shares of Class A common
stock and Class B common stock representing at least
5% of the total amount of shares of Class A common stock and Class B common stock
it owns. In addition, GTCR is entitled to designate the replacement for any of its Board designees whose
Board service terminates prior to the end of the director’s term, regardless of GTCR’s
beneficial ownership at that time. GTCR also has the right to have its designees participate on
committees of the Company’s Board proportionate to its voting power, subject to compliance with
applicable law and stock exchange rules. The Director Nomination Agreement also prohibits the Company
from increasing or decreasing the size of our Board without the prior written consent of GTCR. This
agreement will terminate at such time as GTCR beneficially owns less than
5% of the shares of Class A and Class B common stock it beneficially owned at the
date of the IPO.
Registration
Rights Agreement with MLSH 1 and MLSH 2
In
connection with the IPO, Company entered into a registration rights agreement with MLSH 1 and MLSH 2.
MLSH 1 and MLSH 2 are entitled to request that the Company register their shares of capital stock on a
long-form or short-form registration statement on one or more occasions in the future, which
registrations may be “shelf registrations.” MLSH 1 and MLSH 2 are also entitled to
participate in certain of our registered offerings, subject to the restrictions in the registration
rights agreement. During 2021, the Company registered shares of Class A shares held by MLSH 1 which were
subsequently sold in an offering as selling shareholders as well as facilitated secondary offering
transactions related to the exchanges (see Note 10).
Exchange
Agreement with MLSH 1
In
connection with the IPO, the Company entered into an exchange agreement with MLSH 1, whereby MLSH 1 may
surrender their LLC Units to Topco LLC or, at our election, exchange its LLC Units for shares of our
Class A common stock on a
one-for-one basis, or, at our election, for cash from a substantially concurrent
public offering or private sale. MLSH 1 is also required to deliver to us an equivalent number of shares
of Class B common stock to effectuate an exchange. MLSH 1 executed two exchanges under this agreement
during 2021 (see Note 10).
Payable
to Related Parties Pursuant to the Tax Receivable Agreement
Concurrent
with the completion of the IPO, the Company entered into a TRA with MLSH 1 and MLSH 2. During the years
ended December 31, 2022 and 2021, the Company made TRA payments to both MLSH 1 and MLSH 2 (see Note
14).
Cash
Contribution, Exchange and Forfeiture Agreement with MLSH 1
In
December 2021, the Company entered into a Cash Contribution, Exchange and Forfeiture Agreement with MLSH
1 (see Note 10).
Topco
LLC Operating Agreement
MLSH
1 is party to the Topco LLC operating agreement put in place at the date of the Organizational
Transactions. This agreement includes a provision requiring cash distributions enabling its owners to
pay their taxes on income passing through from Topco LLC. During the years ended December 31, 2022,
2021 and 2020, the Company made distributions of $
150.2 million, $
153.5 million and $
8.2 million for tax liabilities to MLSH 1 under this agreement,
respectively.
Other
Distributions
In
October 2020, the Company made an $
88.6 million distribution to MLSH 1.
Contract
Development and Manufacturing Agreement with Curia Global
GTCR
has significant influence over Curia Global (“Curia”). During the year-ended
December 31, 2022, the Company paid insignificant amounts to Curia for contract manufacturing and
development services. During the year ended December 31, 2021, the Company paid $
7.4 million to Curia. Such amounts were included in research and development
expenses on the consolidated statements of income.
Maravai
LifeSciences Foundation
In
December 2021, the Company established a new charitable foundation to promote causes tied to
Maravai’s mission. During the year ended December 31, 2021, the Company contributed $
2.0 million to the Foundation. The Company does not control the Foundation’s
activities, and accordingly, does not consolidate the Foundation.
17.
Segments
Operating
segments are defined as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or decision-making group,
in deciding how to allocate resources and in assessing performance. When determining the reportable
segments, the Company aggregated operating segments based on their similar economic and operating
characteristics. Segment results are presented in the same manner as we present our operations
internally to make operating decisions and assess performance. The accounting policies for the segments
are the same as those described in Significant Accounting Policies (see Note 1). The Company’s
financial performance is reported in
three segments. A description of each segment follows:
•Nucleic
Acid Production:
focuses on the manufacturing and sale of highly modified nucleic acids products to support the needs of
customers’ research, therapeutic and vaccine programs. This segment also provides research
products for labeling and detecting proteins in cells and tissue samples.
•Biologics
Safety Testing:
focuses on manufacturing and selling biologics safety and impurity tests and assay development services
that are utilized by our customers in their biologic drug manufacturing spectrum.
•Protein
Detection:
focused on manufacturing and selling labeling and visual detection reagents to scientific research
customers for their tissue-based protein detection and characterization needs. The Company completed the
divestiture of its Protein Detection business in September 2021 (see Note 2).
The
Company has determined that adjusted earnings before interest, tax, depreciation and amortization
(“Adjusted EBITDA”) is the profit or loss measure that the CODM uses to make resource
allocation decisions and evaluate segment performance. Adjusted EBITDA assists management in comparing
the segment performance on a consistent basis for purposes of business decision-making by removing the
impact of certain items that management believes do not directly reflect the core operations and,
therefore, are not included in measuring segment performance. The Company defines Adjusted EBITDA as net
income before interest, taxes, depreciation and amortization, certain non-cash items and other
adjustments that we do not consider in our evaluation of ongoing operating performance from period to
period. Corporate costs, net of eliminations, are managed on a standalone basis and not allocated to
segments.
The following schedule includes
revenue and adjusted EBITDA for each of the Company’s reportable operating segments (in
thousands). We have revised our presentation for the prior periods below to remove the
presentation of Total Adjusted EBITDA and reconcile the total of our reportable segments’
measure of profit or loss to income before income taxes in addition to net income, and removed
corporate costs, net of eliminations from total reportable segments’ adjusted EBITDA and
included such amounts in the reconciliation to income before income taxes. Additionally, we have
revised our prior years’ presentation of our
total
reportable segments’ revenue, in which we removed intersegment eliminations from our total
reportable segment’s revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
2022
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
Nucleic
Acid Production |
$
|
813,076
|
|
|
$
|
712,520
|
|
|
$
|
207,597
|
|
|
Biologics
Safety Testing |
69,932
|
|
|
68,417
|
|
|
54,897
|
|
|
Protein
Detection |
—
|
|
|
18,959
|
|
|
22,881
|
|
|
Total
reportable segments’ revenue |
883,008
|
|
|
799,896
|
|
|
285,375
|
|
|
Intersegment
eliminations |
(
7) |
|
|
(
656) |
|
|
(
1,277) |
|
|
Total
|
$
|
883,001
|
|
|
$
|
799,240
|
|
|
$
|
284,098
|
|
|
|
|
|
|
|
|
Segment
adjusted EBITDA: |
|
|
|
|
|
|
Nucleic
Acid Production |
$
|
638,337
|
|
|
$
|
565,254
|
|
|
$
|
133,822
|
|
|
Biologics
Safety Testing |
54,841
|
|
|
54,440
|
|
|
44,516
|
|
|
Protein
Detection |
—
|
|
|
6,391
|
|
|
9,225
|
|
|
Total
reportable segments’ adjusted EBITDA |
693,178
|
|
|
626,085
|
|
|
187,563
|
|
|
Reconciliation
of total reportable segments’ adjusted EBITDA to income before income
taxes |
|
|
|
|
|
|
Amortization
|
(
24,269) |
|
|
(
18,339) |
|
|
(
20,320) |
|
|
Depreciation
|
(
7,566) |
|
|
(
6,413) |
|
|
(
5,593) |
|
|
Interest
expense |
(
20,414) |
|
|
(
30,260) |
|
|
(
30,740) |
|
|
Interest
income |
2,338
|
|
|
—
|
|
|
—
|
|
|
Corporate
costs, net of eliminations |
(
55,378) |
|
|
(
43,265) |
|
|
(
18,398) |
|
|
Other
adjustments: |
|
|
|
|
|
|
Acquisition
contingent consideration |
7,800
|
|
|
—
|
|
|
—
|
|
|
Acquisition
integration costs |
(
13,362) |
|
|
(
44) |
|
|
(
3,857) |
|
|
Acquired
in-process research and development costs |
—
|
|
|
—
|
|
|
(
2,881) |
|
|
Equity-based
compensation |
(
18,670) |
|
|
(
10,458) |
|
|
(
24,629) |
|
|
GTCR
management fees |
—
|
|
|
—
|
|
|
(
680) |
|
|
Gain
on sale of business |
—
|
|
|
11,249
|
|
|
—
|
|
|
Gain
on sale and leaseback transaction |
—
|
|
|
—
|
|
|
19,002
|
|
|
Merger
and acquisition related expenses |
(
2,416) |
|
|
(
1,508) |
|
|
(
395) |
|
|
Financing
costs |
(
1,078) |
|
|
(
2,383) |
|
|
(
9,784) |
|
|
Acquisition
related tax adjustment |
(
349) |
|
|
—
|
|
|
—
|
|
|
Tax
Receivable Agreement liability adjustment |
(
4,102) |
|
|
6,101
|
|
|
—
|
|
|
Chief
Executive Officer transition costs |
(
2,426) |
|
|
—
|
|
|
—
|
|
|
Other
|
(
1,814) |
|
|
—
|
|
|
(
7,592) |
|
|
Income
before income taxes |
551,472
|
|
|
530,765
|
|
|
81,696
|
|
|
Income
tax expense |
(
60,809) |
|
|
(
61,515) |
|
|
(
2,880) |
|
|
Net
income |
$
|
490,663
|
|
|
$
|
469,250
|
|
|
$
|
78,816
|
|
During
the year ended December 31, 2022, intersegment revenue was
immaterial between the Nucleic Acid Production and Biologics Safety Testing
segments. During the years ended December 31, 2021 and 2020, intersegment revenue was $
0.7 million and $
1.3 million, respectively, between the Nucleic Acid Production and Protein
Detection segments. The intersegment sales and the related gross margin on inventory recorded at the end
of the period are eliminated for consolidation purposes. Internal selling prices for intersegment sales
are consistent with the segment’s normal retail price offered to external parties. There was
no
commission expense recognized for intersegment sales for the years ended
December 31, 2022, 2021 and 2020.
The Company does not allocate assets to its
reportable segments as they are not included in the review performed by the CODM for purposes of
assessing segment performance and allocating resources.
18.
Subsequent Event
In January 2023, we completed the acquisition of
Alphazyme, LLC (“Alphazyme”), a privately-held original equipment manufacturer
(“OEM”) provider of custom, scalable, molecular biology enzymes to customers in the genetic
analysis and nucleic acid synthesis markets. The total consideration to acquire Alphazyme consisted of a
base cash purchase price of $
70.0 million, subject to customary post-closing adjustments, and potential
performance payments payable in cash of up to $
75.0 million.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item
9A. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Under
the supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Our
disclosure controls and procedures are designed to ensure that information required to be disclosed in the
reports that are filed or submitted under the Exchange Act is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding
required disclosures. In designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company’s disclosure controls and procedures were effective at
a reasonable assurance level.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial
reporting. Our internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally accepted in the United States. Because
of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can provide only reasonable
assurance of achieving their control objectives.
Our
management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2022. In making this assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework
(2013 Framework). Based on its assessment, management concluded that, as of December 31, 2022, the
Company’s internal control over financial reporting was effective. Ernst & Young LLP, an
independent registered public accounting firm, has issued an auditors’ report on our internal control
over financial reporting as of December 31, 2022, which is included elsewhere in this Annual Report on
Form 10-K.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act, during the three months ended December 31, 2022 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Report
of Independent Registered Public Accounting Firm
To
the Stockholders and the Board of Directors of Maravai LifeSciences Holdings, Inc.
Opinion
on Internal Control Over Financial Reporting
We
have audited Maravai LifeSciences Holdings, Inc.’s internal control over financial reporting as of
December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO
criteria). In our opinion, Maravai LifeSciences Holdings, Inc. (the Company) maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2022, based on the
COSO criteria.
We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of Maravai LifeSciences Holdings, Inc. (the Company) as of
December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income,
changes in stockholders’ / member’s equity and cash flows for each of the three years in the
period ended December 31, 2022, and the related notes and our report dated February 28, 2023
expressed an unqualified opinion thereon.
Basis
for Opinion
The
Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting included
in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects.
Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition
and Limitations of Internal Control Over Financial Reporting
A
company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/
Ernst & Young LLP
San
Mateo, California
February 28,
2023
Item
9B. Other Information
None.
Item
9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not
applicable.
Part
III.
Item
10. Directors, Executive Officers and Corporate Governance
The
information required by this Item is incorporated by reference to the Company’s 2023 Proxy Statement
(the “2023 Proxy Statement”) to be filed with the SEC within 120 days after December 31,
2022 in connection with the solicitation of proxies for the Company’s 2023 annual meeting of
stockholders.
Item
11. Executive Compensation
The
information required by this Item is incorporated by reference to the 2023 Proxy Statement, which is
expected to be filed no later than 120 days after the end of our fiscal year ended December 31,
2022.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The
information required by this Item is incorporated by reference to the 2023 Proxy Statement, which is
expected to be filed no later than 120 days after the end of our fiscal year ended December 31,
2022.
Item
13. Certain Relationships and Related Transactions and Director Independence
The
information required by this Item is incorporated by reference to the 2023 Proxy Statement, which is
expected to be filed no later than 120 days after the end of our fiscal year ended December 31,
2022.
Item
14. Principal Accounting Fees and Services
The
information required by this Item is incorporated by reference to the 2023 Proxy Statement, which is
expected to be filed no later than 120 days after the end of our fiscal year ended December 31,
2022.
Part
IV.
Item
15. Exhibits and Financial Statement Schedules
(a)
The following documents are filed as a part of this report:
(1) Consolidated
Financial Statements (included in Item 8):
(2) Financial
Statement Schedules
All
schedules have been omitted because they are not applicable or not required, or because the required
information is included either in the consolidated financial statements or in the notes thereto.
(3) Exhibits
|
|
|
|
|
|
|
|
|
| Exhibit Number
|
|
Description
|
|
|
|
| 2.1§
|
|
Agreement
and Plan of Merger, dated as of August 5, 2021, among Maravai Life Sciences, Inc.,
Voyager Group Holdings, Inc., Maravai LifeSciences Holdings, Inc., and Maravai
Intermediate Holdings, LLC (incorporated by reference to Exhibit 2.1 to Maravai
LifeSciences Holdings, Inc.’s
Form 8-K filed on August 10, 2021).
|
|
|
|
| 2.2§
|
|
Amendment
No. 1, dated as of September 2, 2021, to the Agreement and Plan of Merger, dated as of
August 5, 2021, among Maravai Life Sciences, Inc., Voyager Group Holdings, Inc., Maravai
LifeSciences Holdings, Inc., and Maravai Intermediate Holdings, LLC
(incorporated by reference to Exhibit 2.1 to Maravai LifeSciences Holdings, Inc.’s
Form 8-K filed on September 3, 2021).
|
|
|
|
| 2.3
|
|
Letter
Agreement, dated November 24, 2021, amending the Agreement and Plan of Merger, dated as
of August 5, 2021, among Maravai Life Sciences, Inc., Voyager Group Holdings, Inc.,
Maravai LifeSciences Holdings, Inc., and Maravai Intermediate Holdings, LLC
(incorporated by reference to Exhibit 2.3 to Maravai LifeSciences Holdings, Inc.'s Form
10-K filed on March 1, 2022).
|
|
|
|
| 2.1
|
|
Amendment
No. 2, dated as of August 30, 2022, to the Agreement and Plan of Merger, dated as of
August 5, 2021, among Maravai Life Sciences, LLC (f/k/a Maravai Life Sciences, Inc.),
Voyager Group Holdings, Inc., Vector Laboratories, Inc., Maravai LifeSciences Holdings,
Inc., and Maravai Intermediate Holdings, LLC (incorporated by reference to Exhibit 2.1
to Maravai LifeSciences Holdings, Inc.’s Form 10-Q filed on November 4,
2022).
|
|
|
|
| 3.1
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|
|
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|
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| 3.2
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| 4.1
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| 4.2
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| 10.1+
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| 10.2§‡
|
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|
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|
|
|
|
|
|
| Exhibit Number
|
|
Description
|
| 10.3#‡
|
|
Amendment
No. 1, effective as of June 6, 2021, to the Supply Agreement, dated as of October 9,
2020, among TriLink Biotechnologies, LLC, Pfizer Inc. and BioNTech SE (incorporated by
reference to Exhibit 10.1 to Maravai
LifeSciences Holdings, Inc.’s
Form 8-K filed on September 3, 2021).
|
|
|
|
| 10.4+§
|
|
|
|
|
|
| 10.5+§
|
|
|
|
|
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| 10.6+§
|
|
|
|
|
|
| 10.7+
|
|
|
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|
|
| 10.8
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|
|
|
|
|
| 10.9
|
|
|
|
|
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| 10.10
|
|
|
|
|
|
| 10.11+
|
|
|
|
|
|
| 10.12
|
|
|
|
|
|
| 10.13§
|
|
First
Lien Credit Agreement, dated as of August 2, 2018, among Maravai Intermediate Holdings,
LLC, Cygnus Technologies, LLC, Trilink Biotechnologies, LLC, Vector Laboratories, Inc.,
Maravai Topco Holdings, LLC and JPMorgan Chase Bank, N.A. (incorporated by reference to
Exhibit 10.13 to Maravai LifeSciences Holdings, Inc.’s Form S-1 filed on October
29, 2020).
|
|
|
|
| 10.14§
|
|
Second
Lien Credit Agreement, dated as of August 2, 2018, among Maravai Intermediate Holdings,
LLC, Cygnus Technologies, LLC, Trilink Biotechnologies, LLC, Vector Laboratories, Inc.,
Maravai Topco Holdings, LLC and Antares Capital LP (incorporated by reference to Exhibit
10.14 to Maravai LifeSciences Holdings, Inc.’s Form S-1 filed on October 29,
2020).
|
|
|
|
| 10.15§
|
|
|
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|
|
| 10.16§
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|
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| 10.17§
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| 10.18§
|
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| 10.19
|
|
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| 10.20+§
|
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|
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| 10.21+§
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
| Exhibit Number
|
|
Description
|
| 10.22+§
|
|
|
|
|
|
| 10.23
|
|
|
|
|
|
| 10.24§
|
|
Credit
Agreement, dated as of October 19, 2020, among Maravai Intermediate Holdings, LLC,
Cygnus Technologies, LLC, Trilink Biotechnologies, LLC, Vector Laboratories, Inc.,
Maravai Topco Holdings, LLC and Morgan Stanley Senior Funding, Inc. (incorporated by
reference to Exhibit 10.24 to Maravai LifeSciences Holdings, Inc.’s Form S-1 filed
on October 29, 2020).
|
|
|
|
| 10.25
|
|
Amendment
No. 2, dated as of January 19, 2022, to the Credit Agreement, dated as of October 19,
2020, among Maravai Intermediate Holdings, LLC, Cygnus Technologies, LLC, Trilink
Biotechnologies, LLC, Maravai Topco Holdings, LLC and Morgan Stanley Senior Funding,
Inc. (incorporated by reference to Exhibit 10.1 to Maravai LifeSciences Holdings
Inc.’s Form 8-K filed on January 20, 2022).
|
|
|
|
| 10.26+
|
|
|
|
|
|
| 10.27+§
|
|
|
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|
|
| 10.28+
|
|
Amendment
No.1, effective as of September 30, 2022, to the Employment Agreement of Carl W. Hull,
dated November 24, 2020, among Maravai LifeSciences Holdings, Inc., Maravai Intermediate
Holdings, LLC and Carl W. Hull (incorporated by reference to Exhibit 10.6 to Maravai
LifeSciences Holdings, Inc.’s Form 8-K filed on October 3, 2022).
|
|
|
|
| 10.29+§
|
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| 10.30+§
|
|
|
|
|
|
| 10.31+§
|
|
|
|
|
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| 10.32+§
|
|
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|
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| 10.33+§
|
|
|
|
|
|
| 10.34+§
|
|
Employment
Agreement of William “Trey” Martin, III, effective as of September 30, 2022,
among Maravai LifeSciences Holdings, Inc., Maravai Intermediate Holdings, LLC and
William “Trey” Martin, III (incorporated by reference to Exhibit 10.1 to
Maravai LifeSciences Holdings, Inc.’s Form 8-K filed on October 3,
2022).
|
|
|
|
| 10.35+
|
|
|
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|
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| 10.36+
|
|
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| 10.37+
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| 21.1
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| 23.1
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| 31.1
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| 31.2
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| Exhibit Number
|
|
Description
|
| 32.1*
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| 32.2*
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| 101.INS
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|
XBRL
Instance Document - the instance document does not appear in the Interactive Data File because
its XBRL tags are embedded within the Inline XBRL document. |
|
|
|
| 101.SCH
|
|
XBRL
Taxonomy Extension Schema Document. |
|
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| 101.CAL
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|
XBRL
Taxonomy Extension Calculation Linkbase Document. |
|
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| 101.DEF
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|
XBRL
Extension Definition Linkbase Document. |
|
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| 101.LAB
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|
XBRL
Taxonomy Label Linkbase Document. |
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| 101.PRE
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|
XBRL
Taxonomy Extension Presentation Linkbase Document. |
|
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| 104
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|
Cover
Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
_______________
|
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| *
|
The
certifications furnished in Exhibit 32.1 and 32.2 hereto are deemed to accompany this Annual
Report on Form 10-K and will not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, except to the extent that the registrant
specifically incorporates it by reference. |
| +
|
Indicates
a management contract or compensatory plan or agreement. |
| §
|
Exhibits
and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be
provided on a supplemental basis to the Securities and Exchange Commission upon request.
|
| ‡
|
Certain
portions of this document that constitute confidential information have been redacted in
accordance with Regulation S-K, Item 601(b)(10). |
(ii)Financial
statement schedules
No
financial statement schedules are provided because the information called for is not applicable or is shown
in the financial statements or notes.
Item
16. Form 10-K Summary
None.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
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|
Maravai
LifeSciences Holdings, Inc. |
|
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|
By:
|
|
/s/
Carl Hull |
|
Name:
|
|
Carl
Hull |
|
Title:
|
|
Executive
Chairman of the Board and |
|
|
|
Interim
Chief Executive Officer |
Date:
February 28, 2023
***
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicted.
|
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| Signature
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|
Title
|
|
Date
|
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|
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|
|
Executive
Chairman of the Board and Interim Chief Executive Officer (Principal Executive Officer)
|
|
February 28,
2023
|
|
/s/
Carl Hull
|
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|
Carl
Hull
|
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|
/s/
Kevin Herde
|
|
Chief
Financial Officer (Principal Financial and Accounting Officer) |
|
February 28,
2023
|
|
Kevin
Herde
|
|
|
|
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|
|
/s/
Sean Cunningham
|
|
Director
|
|
February 28,
2023
|
|
Sean
Cunningham
|
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|
|
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|
|
/s/
Benjamin Daverman
|
|
Director
|
|
February 28,
2023
|
|
Benjamin
Daverman
|
|
|
|
|
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|
|
/s/
Susannah Gray
|
|
Director
|
|
February 28,
2023
|
|
Susannah
Gray
|
|
|
|
|
|
|
|
|
/s/
Robert B. Hance
|
|
Director
|
|
February 28,
2023
|
|
Robert
B. Hance
|
|
|
|
|
|
|
|
|
/s/
Jessica Hopfield
|
|
Director
|
|
February 28,
2023
|
|
Jessica
Hopfield
|
|
|
|
|
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|
|
/s/
Gregory T. Lucier
|
|
Director
|
|
February 28,
2023
|
|
Gregory
T. Lucier
|
|
|
|
|
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|
|
/s/
Luke Marker
|
|
Director
|
|
February 28,
2023
|
|
Luke
Marker
|
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|
|
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|
|
|
/s/
Constantine Mihas
|
|
Director
|
|
February 28,
2023
|
|
Constantine
Mihas
|
|
|
|
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|
|
/s/
Murali K. Prahalad
|
|
Director
|
|
February 28,
2023
|
|
Murali
K. Prahalad
|
|
|